Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Two long-speculated acquisition candidates -- CBOE Holdings and Bats Global Markets -- are now merging in a $3.2 billion deal that will vault the exchange owners past rival Nasdaq in U.S. options trading. The transaction mostly makes sense from a strategic standpoint, as Gadfly explained last week. And while some Bats shareholders may find the price a touch too low, they're better off not fighting it.

The companies announced Monday that CBOE has agreed to pay $32.50 a share for Bats through a mix of cash and stock. It's a typical 30 percent premium over Bats's average closing price for the 20 trading days through Sept. 22. (Its stock surged on Sept. 23 after Bloomberg News reported that a deal was imminent.) The price also marks a 71 percent gain for those who bought Bats in its April market debut. Not bad for a company that flubbed its first IPO attempt on its own exchange several years ago.

Moving Target
As of 10 a.m. New York time, Bats was trading about 3% below CBOE's cash-and-stock bid.
Source: Bloomberg

Some investors did voice displeasure last week at the prospect of Bats getting acquired at these levels. Those folks should keep this in mind: Analysts on average predict that without a deal, Bats will trade for only around $26 a share in a year's time, and none recommend buying here. They could be wrong, but the takeover price looks far more compelling when viewed through that prism. Plus, shareholders will get a stake in the combined entity, meaning there's an opportunity to profit further from a merger that's expected to be beneficial for the company's bottom line.

Limited Upside
If you believe analysts, CBOE is offering a better alternative to Bats remaining a stand-alone public entity.
Source: Bloomberg

More important, it's better for Bats shareholders if this transaction closes quickly. For some time now CBOE has been considered one of the industry's most likely takeover candidates and arguably more attractive than Bats. Its unique position of having a monopoly over S&P 500 and VIX options makes it quite appealing as exchanges face stiffening price competition over most other securities. 

So, you can't rule out the prospect of previously acquisitive companies trying to break up the Bats deal by bidding for CBOE instead. CME Group, Nasdaq and Intercontinental Exchange (which bought the New York Stock Exchange in 2013) all come to mind. 

For some, CBOE's interest in Bats's U.S. and European cash-equities businesses is a bit of a head-scratcher. On the one hand, it provides diversification. And it was highlighted near the top of the companies' merger announcement. However, as we said last week, one can also envision CBOE eventually wanting to siphon off the equities platform to a larger player, such as Nasdaq, ICE or on the European side, Euronext. 

For Bats, CBOE is offering a fair price, a stake in the merger and a lucrative exit. What's not to like?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net