Chicago has gobbled up another Kansas City-area business.
On Monday, Lenexa-based Bats Global Markets Inc., operator of the nation’s second-largest stock exchange, agreed to a $3.2 billion buyout offer from Chicago-based CBOE Holdings Inc.
The deal comes less than four years after Chicago-based CME Group agreed to buy the 156-year-old Kansas City Board of Trade. Less than a year later, CME shuttered the Kansas City wheat market that had begun before Abraham Lincoln became president.
Monday’s merger announcement involves dissimilar operations. Bats’ exchanges involve electronic trading and have been a disruptive force in U.S. equity markets since their 2005 founding by a former Cerner employee. CBOE is more old-school, still operating some markets the old-fashioned way with traders establishing prices in face-to-face dealings.
In Monday’s announcement, CBOE said Bats’ Lenexa operations would serve as the technology hub of the combined businesses and that CBOE’s markets would migrate to Bats’ proprietary trading platform operated from Lenexa.
Bats CEO Chris Concannon offered no details Monday about future employment in Lenexa but said Bats’ 142 local “employees and culture are an essential part of this transaction, and the combined organization is committed to the city.”
CBOE said Concannon would be president and chief operating officer after the merger, and Bats’ technology chief Chris Isaacson would be chief information officer after the merger.
Edward T. Tilly, CBOE’s CEO, will remain CEO. Combined, the companies will have revenues of more than $1 billion.
The sale comes just five months after Bats became a publicly traded company with its shares trading on its own exchange. This deal, however, was not in the company’s original plan.
“Bats was not for sale,” Concannon said Monday during a conference call with analysts. “Bats found a strategic relationship that was unparalleled in how we fit together.”
Bats operates stock exchanges in the United States and across much of Europe, as well as a foreign currency market. CBOE operates futures and options markets. The distinction should help the deal pass muster with regulators.
The two companies also will try to merge despite their dramatically different roots.
Founded in 1973, CBOE operates futures and options markets. It became a publicly traded company in 2010.
CBOE’s hallmark products are trading in options that track the widely followed Standard & Poor’s 500 stock market index and its CBOE Volatility Index, called VIX, that measures Wall Street’s mood through stock market swings.
Bats began in 2005 as an effort to reverse a trend toward fewer and fewer places to trade stocks.
Dave Cummings, a former Cerner Corp. employee, launched Bats’ predecessor, Bats Trading, as an electronic trading center. Cummings, who grew up in Weatherby Lake in Platte County, had become a stock trader and had built computerized trading programs that became Tradebot Systems Inc.
As a trader, Cummings felt squeezed by a wave of mergers among stock trading centers and set out to build his own market with a better alternative trading system, hence the name Bats. In four months, the company went from left-for-dead to handling 10 percent of trades in Nasdaq-listed stocks on a daily basis.
Cummings sold off pieces of Bats Trading to big Wall Street brokerages, then funneled millions of dollars into an effort to attract trading volume. When Bats agreed to merge with Direct Edge in 2013, it began to handle more daily trading volume in all U.S. stocks than Nasdaq and ranked second only to the New York Stock Exchange.
CBOE was clear in its comments Monday that it values Bats not only for its markets but also for its proprietary trading platform. CBOE said its markets will migrate to Bats’ system. CBOE also sees Bats’ European markets as a place where it can expand its own operations.
Bats also is active in listing exchange-traded investment funds, and CBOE officials said exchange-traded products, particularly index-related ones, offer growth potential for the merged businesses.
At the same time, the companies expect the merger to eliminate as much as $60 million in expenses within five years and include a “reduction of IT resources” as one source of those savings. Bats’ 142 Lenexa employees are among 325 working in its global operations that include New York and London.
In the deal, Bats shareholders will receive 31 percent of the purchase price in cash and CBOE shares equal to the remaining 69 percent. The $3.2 billion value is based on CBOE’s shares valued at $70.30.
CBOE shares fell $3.71, or 5.28 percent Monday, to close at $66.59. Bats shares, which had soared Friday on unconfirmed reports of its talks with CBOE, lost $1.45, or 4.56 percent, to close at $30.35.
Each Bats share will receive $10 in cash and 0.3201 shares of CBOE. The agreement, however, allows each Bats shareholder to elect to receive all cash or all stock.
Shareholders of both companies will vote on the proposed merger, which also requires regulatory clearances and approval.