Highly anticipated public debut of options exchange CBOE to test shaky market for IPOs

Options exchange CBOE to test shaky IPO market

NEW YORK — The most anticipated IPO so far this year, CBOE Holdings Inc., is expected this week, but worries about its high price compared to other exchanges could weigh on its shares in the current lackluster environment.

The Chicago Board Options Exchange is the country’s largest options exchange and the last major U.S. exchange to go public. The initial public offerings, earlier this decade, of other exchanges logged impressive returns and CBOE has a well-known brand, said Scott Sweet, head IPO researcher of IPO Boutique.

“The IPO market is horrid. Had this come out in a better time, it would probably be looking at a ‘moon shot’ premium,” said Sweet — like the 23 percent gain during rival CME Group Inc.’s first day of trading in December 2002. Despite a big drop during the recession, CME’s shares are still about 800 percent above their IPO price of $35.

CBOE will test a market that has grown increasingly wary of initial public offerings because of volatile stock markets and concern about the global economic recovery. Investors perceive IPOs as riskier bets than established public companies. The success of past exchange IPOs may not be enough to tempt buyers without a cheap price.

CBOE expects to offer shares for $27 to $29 to initial investors, potentially raising as much as $339.3 million. If CBOE’s shares sold initially at $28, that would make the exchange’s stock more expensive than those of CME and IntercontinentalExchange Inc., according to an analysis by IPO expert Francis Gaskins.

In the past five years, CBOE’s net income has grown nearly tenfold. Trading of options, financial instruments whose value depends on an underlying asset, such as a stock, have exploded as hedge funds and other investors use them to offset risks of other investments. It expects to generate additional revenue as a public company from its new trading permits.

CBOE is famous for creating products such as the VIX, a popular gauge of risk known as the market’s “fear index.” It plans to develop other proprietary measures and products to grow revenue.

The exchange is also expected to have a smaller market capitalization than its rivals, making CBOE a potential acquisition target, said IPO expert Francis Gaskins. CBOE is expected to have a market capitalization of about $2.87 billion, while CME’s stands at $19.87 billion and IntercontinentalExchange’s is $9.13 billion. Other exchanges, such as the Chicago Board of Trade and the New York Mercantile Exchange, were acquired within a few years of going public.

But new products and a possible takeover are expectations, not certainties. CBOE’s current business slowed during the recession. Revenue fell 2 percent in 2009, and CBOE’s market share has dropped to 31 percent in 2009 from 45 percent in 2000.

Still, there is big demand for shares of CBOE across the globe, not just in the U.S., said Sweet. But the IPO’s price, which Gaskins thinks is too high, may keep CBOE’s shares from soaring on its first day of trading.

Investors have pushed back against IPO prices this year. Half the IPOs in 2010 priced below expectations. That is the highest percentage this decade, according to IPO research firm Renaissance Capital in Greenwich, Conn.

Goldman Sachs is leading a large group of 18 underwriters on CBOE’s IPO. Since the IPO market came back to life last fall, Goldman has priced a few other prominent deals at the top of or above the expected range, only to have investors watch their shares tank in the first day of trading. That happened with Shanda Games Ltd. in September 2009 and Metals USA Holdings Corp. in early April.

“You start reading about valuations, start looking at the previous deals that have come out that Goldman has brought and you get very concerned,” said Sal Morreale, who tracks IPOs for Cantor Fitzgerald.

Of the 16 IPOs on which Renaissance Capital lists Goldman as the primary manager since September, six, or 38 percent, fell on the first day of trading. Of the 10 gainers, five priced at the very bottom of, or below, expectations, meaning investors demanded a discount on the price before buying. Of the 31 IPOs on which Goldman has been one of the lead managers, according to Renaissance Capital data, nearly a quarter dropped on the first day.

Still, Goldman’s performance reflects industry trends. There have been 95 IPOs since September, and 38 percent have dropped on the first day of trading.

Goldman Sachs spokeswoman Andrea Rachman declined to comment.

Goldman is also a lead manager this week for the IPOs of Motricity Inc., a company that helps wireless carriers deliver data service to their customers; communications software maker BroadSoft Inc.; and Higher One Holdings Inc., which provides financial services to college students.

CBOE is scheduled to start trading on Tuesday. If its shares don’t do well, that could wreak havoc on the other IPOs coming to market this week.

“You can bet that if CBOE doesn’t work, the other(s) are history. There’ll be a firestorm,” said Sweet.

Motricity hopes to raise about $102 million, Broadsoft $75 million and Higher One $229 million. Other deals expected this week are China Intelligent Lighting & Electronics Inc., with a $16 million IPO, and Oasis Petroleum Inc., looking to raise about $588 million.