Despite failed attempts to purchase the Euronext NV and the London Stock Exchange, Deutsche Boerse hasn't given up on its acquisitional ambitions. Yesterday, the German exchange made an eye-popping offer of $2.8 billion for International Securities Exchange Holdings (NYSE: ISE ) . It's a clear sign the exchange doesn't want to lose again.
The object of Deutsche Boerse's interest has an unusual origin. In 1997, E*TRADE (Nasdaq: ETFC ) chairman William Porter and his colleague Martin Averbuch wanted to lower the costs of options trading. They tried to negotiate with various options exchanges, but got only resistance. So they started their own competing exchange, recruiting top executives from the NYSE's (NYSE: NYX ) options division and hiring smart engineers to build a sophisticated electronic platform.
Since its launch in May 2000, ISE has become the largest U.S. equity options exchange. Last year, its average trading volume was 2.4 million contracts per day. Revenue increased 29% to $202 million in fiscal 2006, while net income rose 56% to $55.1 million.
It's no wonder, then, that Deutsche Boerse is willing to pay a premium for the ISE. Deutsche Boerse already operates the electronic derivatives exchange known as the Eurex, and it can leverage the ISE to further grow its footprint in Europe and expand into Asia.
To gauge the valuation on the deal, I looked at William Blair's fairness opinion on the merger of the Chicago Mercantile Exchange (NYSE: CME ) and the CBOT (NYSE: BOT ) . Analyzing 12 transactions, he came up with a median of 11.6 times EBITDA and a maximum of 23.8 times.
At 28 times EBITDA, the ISE's deal gives the company's shareholders little to quibble about. But shares are already approaching the $67.50 buyout price, raising speculation that other bidders will come to the table. Prospective suitors may include the CME, the NYSE, and the Intercontinental Exchange (NYSE: ICE ) . In the high-stakes world of exchanges, a bidding war here is not far-fetched. Foolish investors are best advised to stay on the sidelines, or risk getting burned.
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