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CBOE to buy upstart Bats to create powerhouse exchange operator

Traders fill orders at the Chicago Board Options Exchange (CBOE) on August 24, 2015 in Chicago, Illinois.

Scott Olson/Getty Images

CBOE Holdings Inc. and Bats Global Markets Inc., two companies based in the American Midwest that operate in the exchange business, are combining to form a powerhouse in equities and options trading.

Chicago's CBOE, which runs the largest options platform in the United States, said on Monday that it has agreed to acquire Bats, a scrappy upstart based in Kansas that operates four equities exchanges in the United States and the largest in Europe, in a cash and stock deal worth about $3.2-billion (U.S.), or $32.50 a Bats share.

The transaction is part of a flurry of consolidation across the global exchange industry that has seen some of the world's largest trading venues turn to deal-making to bolster their bottom lines through cost savings and expand their reach across both borders and asset classes.

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It comes months after London Stock Exchange Group PLC and Deutsche Boerse AG revealed their $27-billion megamerger to create an exchange operator big enough to take on the Americans. In the derivatives space, Nasdaq Inc. said in March that it would acquire options-exchange operator International Securities Exchange from Deutsche Boerse for $1.1-billion.

Investors in Bats are cashing in just five months after the company, which was founded in 2005, went public. (Its initial public offering was priced at $19 a share.)

The companies said on Monday on a joint conference call with analysts that Bats wasn't for sale and it didn't run an auction to sell itself, leaving some analysts to wonder about the timing of this acquisition.

"We feel like we can start producing shareholder value now," Chris Concannon, chief executive officer at Bats, said, responding to a question about whether Bats could have been in a position to buy CBOE or another player if it had more time to grow on its own. "So the notion of waiting until Bats gets bigger and becomes the buyer, I've never thought of that."

For CBOE, acquiring Bats will expose it to more than markets in the United States and the options and futures trading it handles today. With Bats, CBOE will gain a foothold in Europe and will also offer investors access to stocks, exchange-traded funds and currencies. It also will diversify CBOE's revenue streams from mainly transaction fees per derivatives contract to more sales generated from the distribution of market data.

"In addition to expanding CBOE's product line," Edward Tilly, chief executive officer of CBOE, explained on Monday's conference call, "the acquisition will broaden our customer reach with Bats' European presence, and increase our non-transaction revenue stream with Bats' market data services."

Mr. Tilly will retain his role as CEO at the combined company, while Mr. Concannon will become the president and chief operating officer. The deal, which requires regulatory and shareholder approval, is expected to close during the first half of 2017.

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Shares of CBOE fell 5.3 per cent Monday to $66.59.

Bats's stock also traded lower, sliding 4.6 per cent to $30.35. Its shares rose 20 per cent this past Friday after it was first reported that the pair of companies were in talks.

CBOE said it will use Bats's proprietary technology at the combined company, which will be based in Chicago. The shift to Bats trading systems will take roughly four years to fully complete.

"Technology is becoming more of a big deal as traders prioritize speed and fill rates," Callie Bost, an analyst at TABB Group LLC who researches the listed derivatives market, said on Monday in a phone interview.

"And Bats' technology is one of the best offerings in the listed-options space," she said.

The migration to Bats's technology is part of a bigger plan to save $50-million annually within three years after the deal is complete. Within five years, these cost synergies are expected to increase to $65-million, with the bulk of these savings tied to sharing IT systems and eliminating redundancies in infrastructure.

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"This transaction is all about cost synergies," Mr. Concannon said.

It is also about combining complementary assets that will help these already-large exchange operators better compete on an increasingly global stage.

"The fact that [CBOE and Bats] are so different right now makes this a deal that makes sense," Ms. Bost said. "Being able to offer more to investors is typically a winning strategy for an exchange operator."

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