Who Will Acquire CBOT Holdings?

CBOT Holdings (BOT) is a derivatives exchange that operates both electronic exchanges as well as open outcry trading floors. BOT makes most of its revenue from trading of futures and options based on US treasuries. After pricing its IPO in late 2005, the stock has had an impressive run and is currently hovering around $200 after reporting EPS at $3.44 for 2006.

The stock is currently being courted by both the Chicago Mercantile Exchange (CME) as well as the Intercontinental Exchange (ICE). The bidding has been fast and furious as each company desperately wants to have access to BOT's valuable business. According to the current market value of all participants, the bid by ICE is a bit higher. ICE is offering 1.42 shares for every BOT shares - with ICE's 4:00 close of 149.19, the value for each share of BOT is $211.85. CME is offering 0.35 shares for each BOT share. CME closed at 557.07 implying a value of $194.97 for BOT. BOT closed at a premium to CME's bid and a discount to ICE's bid. From the sidelines, it looks as if the market is expecting CME to acquire BOT but it is likely that CME will increase their offer for the company.

After my previous post on Intercontinental Exchange, I was informed by CBOE management that I had some factual misunderstandings regarding their agreement with the CBOE and BOT. In an effort to sweeten their bid for BOT, ICE offered to solve a dispute that has been simmering between BOT and CBOE for years. I erroneously believed that this agreement involved ICE acquiring the CBOE after completing their proposed acquisition of BOT. The actual agreement is much different.

When CBOE was spun off from BOT, every full BOT member had rights to trade on the CBOE. This right included voting rights for CBOE matters but one could not exercise that right and still have privileges at the BOT. However, a BOT member that exercised his right to trade / vote on the CBOE could subsequently revert back to being a BOT member. If BOT merges with CME, the CBOE believes that these rights will be terminated according to the original legal agreement. This obviously is not acceptable to BOT members who consider these rights to have value. ICE, in its desire to complete the deal with BOT members, has agreed to compensate BOT members for their loss of this right to the tune of $500,000 per member. This offer is contingent on BOT merging with ICE and would leave ICE and CBOE separate and distinct entities.

Now, for those BOT members reading this, I am sure that is an oversimplification of the details but it should hit the high points and still be relatively understandable to us who are not members of either firm. My apologies for my earlier misconception.

At any rate, it should be exciting to see who ends up purchasing BOT, who is left without a partner (CME or ICE) and what will happen to each company after a deal is inked. I have a feeling that BOT will end up agreeing to be bought by CME for a higher price than the 0.35 shares, and ICE will receive an offer from NYSE (NYX) or possibly another player hoping to pick up a futures exchange to add to their portfolio. There is significant value for these companies in consolidating and cutting back on expenses while still benefiting from the global increases in trading and liquidity that is so prevalent.

Disclosure: Author has a long position in BOT and ICE, and a short position in CME

BOT 1-yr chart