GS) second name might by spelled better using a different vowel. There was a time when Goldman's name was synonymous with a successful deal, but after the abysmal performance of both Niska Gas Storage Partners ( NKA) and Metals USA Holding ( MUSA), that is no longer the case; now its priority seems to be catering to the issuers rather than giving investors good value. Goldman has repeatedly gone against the grain, pricing four of its recent deals at or above their high-end expected price range, leading investors to believe these held value. The Street has yet to resolve the fact that Goldman brought new definition to the phrase "caveat emptor" with MUSA, pricing it $1 above the original price range, followed by opening -$0.95 and closing -$1.93 on the day. If you really want to get sick, it is now trading down more than 30.0% from its issue price.
We are not saying that all of Goldman's deals need to be winners, but this disconnect between Goldman's pricing terms and the IPO's actual performances has burned bridges with some investors. However, CBOE might go a long way toward reversing the backlash Goldman has felt. Despite Goldman also dropping the ball when it comes to supporting its deals in the aftermarket, it has been successful as far as choosing to lead some fundamentally strong companies, which did not need its "help" in order to open with a premium and maintain higher aftermarket levels. There is no doubt that CBOE will fall into this category, generating investors' interest at the opening. Expected to be one of the top performers of 2010 to date, Goldman will most likely price the deal above its current price range of $27 to $29 and possibly increase the 11.7 million shares, hopefully not stretching the limits of investor demand.
OK, enough about Goldman, let's talk about the company. We expect the effects of the 2008 "financial crisis" to be felt by everyone for years to come, and CBOE was not immune to the immediate impact, as its first-quarter revenue showed sequential declines. If that's going to bother you, than don't bother reading any further. Investment banks, hedge funds and institutional and retail investors have reduced on most investment activities, leading to a reduction in the number of participants in the options markets. FY 2009 volume on the U.S. options exchange managed to still improve by 1% over FY 2008, but this significantly lagged behind the average +25.2% compound annual growth rate these exchanges have enjoyed since 1973. Additionally, potential SEC regulations could place a $0.30 per contract limit on total access fees charged, possibly reducing CBOE's annual revenues by -4% to -5% or roughly $23.9 million. Remember, the operative phrase here is "potential regulation." The silver lining here is that CBOE remains an innovative leader in its market and will most likely bounce back quicker and be better equipped to absorb these challenges and potential regulations. There is immense value in this stock, and CBOE has the staying power to offer long-term growth potential. While CBOE may no longer be the only provider of options trading, it may arguably remain the best, operating a quote-driven auction market that utilizes a hybrid "open outcry" and electronic trading methods to deliver a reliable tool for investors to transfer risk, achieving higher risk-adjusted returns. CBOE is continually offering innovative products, including its most notable volatility index known as the VIX, which measures investor sentiment and is popularly known as the "fear gauge." Going forward, investors can look forward to the potential benefits from derivatives registration legislation and the late 2010 launch of C2, a second, all-electronic options market. Although it has tried to transfer to an all-electronic platform in the past with little success, the markets may be ready now, and this will be an additional product, rather than a replacement. With the acceptance of Internet-based operations and an increased level of consolidation, CBOE is in the midst of an intensely competitive market, including seven other U.S. options exchanges, some of which have previously come public. It was only a matter of time before CBOE followed suit, selling 82% of this offering; but this now entails a somewhat complicated restructuring, with nearly all of the proceeds going to repurchase stock, shifting ownership from a member-owned, non-stock corporation to a for-profit stock corporation. Members will have the option to convert their Class A and Class B commons stock either into unrestricted shares, if they are selling at the IPO, or allow each share to convert into Class A-1 and Class A-2 shares, representing ownership in CBOE Holdings. All rights and privileges will remain constant, but this new structure will offer greater flexibility to evolve its business. Its experienced management team offers decades of experience, with some top members having been with CBOE since the beginning. Investors can expect future innovations from the team, which has been the "brains behind the operation," growing the company to its current levels.
So far in 2010, investors have seen more than they would like of dissatisfying IPOs, but CBOE should not be penalized just because some deals left a bad taste in the mouths of investors. The caliber of this IPO has been nearly unrivaled this year by any other offering, and investors would be well advised to seize the opportunity to acquire a fundamentally solid company for their portfolios. Goldman Sachs' track record may throw a small wrench in the works, but this stock almost sells itself, and investors may never see CBOE trade at its IPO price again. That is not meant to discourage investors but rather support buying the stock at the IPO-priced shares, long-term value will present itself to investors over time.