Shares of CBOE Holdings Inc jumped 12 percent in their market debut as investors flocked to the last major North American financial exchange to go public and a potential takeover target.
Shares of the largest U.S. options market closed at $32.49 on the Nasdaq on Tuesday after pricing at $29 a share late on Monday. At one point during the first day of trading the shares were up as much as 16.4 percent.
A strong brand deserves a premium. That's what they got, said Josef Schuster, founder of Chicago-based IPO research house IPOX Schuster LLC in Chicago.
CBOE's IPO provides a currency -- shares -- that can be used either to make acquisitions or to facilitate CBOE's takeover by another company.
Speculation on a potential merger partner has most commonly focused on domestic buyers such as CME Group Inc and NYSE Euronext , but has also included overseas players such as Germany's Deutsche Boerse AG and Brazil's BM&F Bovespa SA .
We cannot ignore the possibility that CBOE could be taken over, and the likelihood that its valuation will reflect a degree of takeover/scarcity premium, wrote Credit Agricole Securities analyst Rob Rutschow, who started coverage of CBOE on Tuesday at outperform.
Despite CBOE's strong showing -- new stocks typically jump 10 to 15 percent on their debut -- there could still be challenges ahead.
A July 8 court ruling may determine whether CBOE can continue licensing its highest-margin products, and the U.S. Securities and Exchange Commission is considering fee caps.
The legal dispute hinges on whether exchanges like CBOE will be allowed to keep exclusive rights to offer options on particular indexes like the Standard & Poor's 500.
CBOE currently gets 32 percent of its transaction fees -- the lion's share of its revenue -- from these proprietary index options.
Nevertheless, Thomas Caldwell, Chairman of Toronto-based Caldwell Investment Management and the CBOE's biggest investor, is making a bullish bet on the exchange. He spent $7.4 million on Monday to increase his stake by three trading seats ahead of the IPO.
RINGING THE BELL
CBOE Chief Executive William Brodsky rang Nasdaq's opening bell on Tuesday, joined by Illinois Congressman Danny Davis, Governor Pat Quinn and Chicago Mayor Richard Daley, as well as other top brass from CBOE.
Management is politically connected, said Caldwell in an interview.
You want to have a seat at the table. That's an important thing when you are analyzing a company, particularly when the securities industry is so highly political, and Washington is on a tear, he said.
When Brodsky joined the exchange in 1997, it was by far the biggest in the United States. In 2000, the U.S. Justice Department forced the breakup of de facto monopolies in the industry, and an all-electronic market called the International Securities Exchange began moving in on CBOE's turf.
After years of eroding market share and an ever-more restless membership -- some of whom would adorn their trading jackets with anti-Brodsky buttons -- the CEO finally turned things around with a new trading system that wedded electronics to open outcry, a system still in use today.
The IPO gives newfound flexibility to CEO Brodsky, freeing him from the need to balance the interests of member-owners against his goal to maximize CBOE's profits. It is also profitable for Brodsky, 66, whose personal shares are valued over $6.5 million.
Brodsky has publicly acknowledged past merger talks with the Chicago Board of Trade, now owned by CME.
International Securities Exchange and the CBOT, whose 2005 IPOs were marked by early share-price surges, were both later acquired by larger competitors at fat premiums.
NOT YOUR TYPICAL IPO
CBOE's IPO raised about $339 million and gave CBOE a market value of $2.97 billion.
It was a surprising show of strength in the U.S. IPO market, which in recent weeks has suffered from equities volatility due to worries over Europe's sovereign debt woes.
But experts cautioned against CBOE's success spilling over into the broader U.S. IPO market.
It's a business model that investors like a lot, and it's a proven company, said analyst Nick Einhorn of Greenwich, Connecticut-based IPO research house Renaissance Capital. It's a little different from a typical IPO.
CBOE, founded in 1973 as a member-owned offshoot of the Chicago Board of Trade, has said it will use proceeds from the IPO to conduct share buybacks from members, who otherwise would have to wait at least six months before selling their stock.
Last quarter, CBOE earned $22.7 million on revenue of $101.1 million. Results are set to jump as the exchange begins charging for trading access.
Analyst Christopher Allen of Ticonderoga Securities in New York estimates that such fees will generate $81 million in revenue in 2011, boosting earnings per share by 38 percent.
(Reporting by Ann Saphir in Chicago and Clare Baldwin in New York; Editing by Lisa Von Ahn, John Wallace and Tim Dobbyn)