CBOE's Successful IPO: Positive Sign in a Turbulent Market

| About: CBOE Holdings (CBOE)

On Tuesday, the much awaited initial public offering (IPO) of Chicago Board Options Exchange “CBOE” Holdings Inc. (NASDAQ:CBOE) raised $339 million from the sale of 11.7 million shares. Shares fetched $29 each, at the upper end of its expected range of $27−$29.

The IPO was underwritten by Goldman Sachs Group (NYSE:GS). The shares of CBOE are trading on the NASDAQ under the ticker symbol "CBOE."

Founded in 1973, CBOE’s IPO plan had been devised long back but was held up by a legal hassle with the members of the former Chicago Board of Trade (“CBOT”). CBOT is the futures exchange from which CBOE Holdings was originally spun off and which was bought by Chicago Mercantile Exchange Group Inc. (NASDAQ:CME) in August 2008.

The newly traded company will utilize the net proceeds of the IPO for its business operations and pay its settlement dues to the former members of the CBOT.

CBOE Holdings plans to pay regular quarterly dividends, anticipating an annual dividend target of approximately 20% to 30% of the prior year's net income, adjusted for unusual items.

Previously, when the exchange had declared to go public on March 11, 2010, CBOE had projected the IPO to be worth $300 million and further discounted it due to the ongoing debt crisis in Europe that followed the plummeting of the U.S. stock prices.

Conversely, the stock soared 12% on its debut, valuing the exchange at a whopping $2.97 billion. The CBOE IPO was valued at a higher multiple of future earnings than rival exchanges such as CME, NYSE Euronext Inc. (NYSE:NYX) and InterContinental Exchange Inc. (NYSE:ICE), given its history of rapid growth, exclusive products and potential to be acquired. Consequently, the already strong domestic peers in the industry such as NYSE, ICE and CME as well as the overseas companies such as Germany's Deutsche Boerse AG and Brazil's BM&F Bovespa SA eye CBOE as an acquisition partner.

CBOE Holdings has a smaller market capitalization of about $450 million. In contrast, its rival CME has a market capitalization of about $20.4 billion, NYSE has $7.7 billion and NASDAQ has $4.1 billion, making CBOE an affordable buyout target.

We believe CBOE's successful IPO in such a turbulent market will motivate other high-profile companies to follow suit. In addition, the company's net income has multiplied ten-fold in the past five years, and it expects to generate additional revenues from its new trading permits as a public company. However, its business has been dwindling, with declining fees on equities that also pressured the bottom line and margins during its most recent quarter.

Further, regulatory procedures are expected to pressurize the financials of the company. The SEC has proposed capping access fees at 30 cents per contract in April, which would chop about $14.2 million off the annual revenues of CBOE. The SEC has also proposed banning flash trading, in which customers pay to see and trade on incoming orders fractionally before others.

Moreover, people have become cautious lately with an IPO market due to high stock volatility and global economic recovery concerns. So, a price of $29 per share will make the CBOE stock more expensive than that of CME and ICE. In addition, due to the presence of a number of exchanges in the market, CBOE’s market share will be slashed.

Overall, we believe a merger can provide strength to the CBOE’s long-term growth prospects, given the current critical sustainability factor in the already saturated trading market.