On Thursday, the final major private options exchange left in the U.S. − the Chicago Board Options Exchange (CBOE) − unveiled its decision of demutualization and going public by filing the initial S-1 form to the Securities and Exchange Commission (SEC) for an initial public offering (IPO) of approximately $300 million. The company is expected to conclude both the processes by the end of the first half of 2010. The IPO will be coordinated by Goldman Sachs Group Inc. (GS).
Founded in 1973, CBOE’s IPO plan was being devised long time ago but it got delayed due to the legal hassle with the members of the former Chicago Board of Trade (CBOT). CBOT is the futures exchange from which CBOE was originally spun off in 1973 and which was bought by the Chicago Mercantile Exchange Group Inc. (CME) in August 2008.
The issue of the dispute rose when some CBOT members retained trading rights in the CBOE, claiming that they were entitled to a share of the CBOE upon demutualization. Though for several years, CBOE had been arguing that any merger effectively eliminated CBOT members’ exercise rights, it finally settled the dispute by paying $4.2 million to the CBOT members in 2009.
The CBOE’s current strategy is to convert from a member-owned organization to a publicly traded corporation (demutualization) known as CBOE Holdings Inc. Many analysts and market insiders expect the company’s market value to go up to $5 billion. CBOE has also announced a special pre-IPO dividend of $113 million and a post-IPO dividend of 20−30% from last year’s profits.
Moreover, the IPO is expected to be accepted by the market on a modestly high premium because of the rumors that CBOE could be an acquisition target for the already strong peers in the industry such as Nasdaq OMX Group Inc. (NDAQ), NYSE Euronext Inc. (NYX), InterContinental Exchange Inc. (ICE) and CME, which has already been in informal speculation. However, all the big shots of the industry first await CBOE to go public and secure a market valuation for itself.
U.S.’s stock exchange industry has a vast history of acquisitions. While Nasdaq acquired Philadelphia Stock Exchange, NYSE acquired Euronext NV and combined in April 2007 to form the Nasdaq OMX Group. Chicago Mercantile Exchange acquired CBOT in 2007 after the latter went public in 2005 along with NYMEX in 2008, which in its turn went public in 2006. Hence, these trends increase the likelihood of the acquisition of CBOE in the near future.
The CBOE projects to utilize the net proceeds of the IPO to repurchase the shares it will issue to both CBOE members in the demutualization and the former members of the CBOT who are due to receive stock as a part of the settlement agreement.
The CBOE recorded a net income of $106.5 million in 2009, down 9.2% from 2008, due to competitive pressures that weighs on the pricing and market share of the company. However, revenue increased 2% from 2008 to $426 million. Given the current critical sustainability factor in the already saturated trading market, we believe a merger can provide strength to the CBOE’s long term growth prospects.

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