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Time's Ripe for a CBOE Deal

Frenzied action by exchanges has some people talking deal.

An industrywide dealmaking frenzy could give the

Chicago Board Options Exchange

some more options.

The exchange, created in 1973 as an offshoot of the

Chicago Board of Trade

(BOT)

, is one of the last major U.S. exchanges still in private hands.

Exchange shares have been soaring, prompting a flurry of deals across the business. With deep-pocketed rivals looking to jump into the lucrative options game, observers say the time could be ripe for a CBOE deal -- though a legal spat with its former parent could cloud the CBOE's prospects.

"The trend is towards global one-stop-shop, multi-asset-class venue," says Adam Sussman, an analyst at TABB Group. "If they want to become a part of that, they do need to get together with another company."

Sussman suggests that the

NYSE

(NYX)

might be interested in acquiring the CBOE, since the Big Board has been vocal about its desire to be "opportunistic," particularly in the derivatives space.

A spokesman for NYSE declined to comment, but exchanges everywhere have been spying opportunity across the globe lately.

On Monday, the CBOE's main competitor in the U.S., the 7-year-old

International Securities Exchange

(ISE)

, sealed a deal to be acquired by a European giant for a nearly 50% premium.

CBOE's former parent, the CBOT, is also involved in the wheeling and dealing. Both the

Chicago Mercantile Exchange

(CME) - Get CME Group Inc. Class A Report

and the

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Intercontinental Exchange

(ICE) - Get Intercontinental Exchange, Inc. (ICE) Report

are looking for control of the CBOT. A deal could be worth between $8 billion and $10 billion.

Observers warn that the frenzy won't last forever, though. Share prices for equity exchanges will likely "cool off" in the next 12 months, predicts Sussman.

"Right now pretty much everybody with the exception of

Nasdaq

I:IXIC

is getting really good valuation because of this merger fever," Sussman says. "That aspect of the share price will cool in the next year," as players take the time to integrate big acquisitions.

On the other hand, Brendan Caldwell, president and CEO of Caldwell Securities in Toronto and a portfolio manager for its New York-based asset management firm, doesn't anticipate a peak in exchange share prices for a few years.

"The volume increases are real and continue," he says. "There is so much liquidity around the world. There is still going to be so much to do on exchanges. I'm firmly of the belief that over the next two to three years you're going to see very many more mergers."

Caldwell's firm is an investor in many exchange stocks. It has purchased 29 CBOE seats and a small stake in the ISE for investors. The firm does not own any seats or shares directly of either exchange.

The ISE-Deutsche Boerse deal places additional pressure on the CBOE to protect its turf.

Since its launch in 2000, the ISE has captured a significant amount of market share from the CBOE, becoming the second-largest options exchange in the U.S. behind it. Larger exchanges such as NYSE Euronext and Nasdaq are also eagerly getting into the options business, either through acquisitions or by building platforms internally.

To be fair, the CBOE has taken steps to file a registration statement with the

Securities and Exchange Commission

to demutualize -- the process of changing from a membership organization to one governed by shareholders. It is typically the first step for a company that plans to do an initial public offering.

And members are definitely gearing up. Earlier this week, the CBOE said three member seats sold as high as $2.4 million per seat. Observers say an IPO could come this summer.

But the IPO process and any acquisitions could be hampered by the CBOE's ongoing spat with the Chicago Board of Trade. The two exchanges disagree over certain exercise rights that the CBOT holds and how the rights will be valued when the CBOE's demutualization process is complete.

The disagreement, which has turned into a legal fight at this point, could deter any buyer interested in the CBOE, since it is unlikely that any buyer would want to get involved. CBOT members are also likely to have a say in the approval of any deal by the CBOE or for the CBOE.

A CBOE spokeswoman said the issue is being reviewed by the SEC. She declined to comment further for this article.

Caldwell says the CBOE should be a buyer rather than a seller.

The CBOE has "brilliant management

that is negotiating a very difficult, very competitive sector," Caldwell says. "When ISE was launched in 2000, the CBOE was just a floor operation. They've been able to introduce a hybrid market and claw back market share. Even as a private, not-for-profit entity, they were able to respond to the challenge that ISE threw down."