BATS files for IPO, as exchanges M&A intensifies

CHICAGO/BANGALORE Fri May 13, 2011 2:15pm EDT

Joe Ratterman, CEO of BATS Global Markets, speaks at the Reuters Exchanges and Trading Summit in New York March 29, 2010. REUTERS/Natalie Behring

Joe Ratterman, CEO of BATS Global Markets, speaks at the Reuters Exchanges and Trading Summit in New York March 29, 2010.

Credit: Reuters/Natalie Behring

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CHICAGO/BANGALORE (Reuters) - BATS Global Markets filed on Friday to go public, a step that will help the exchange operator make acquisitions and better compete in a rapidly consolidating sector.

BATS, the third-largest U.S. exchange, is buying smaller rivals while its two larger competitors, NYSE Euronext NYX.N and Nasdaq OMX Group (NDAQ.O), are trapped in a takeover battle.

A rash of exchange mergers worldwide is boosting investor interest in the industry. That, along with BATS' track record of fast growth, likely bodes well for the offering, Morningstar IPO strategist Bill Buhr said.

"We are talking about a fundamentally strong U.S. company and in an industry where investors want an exposure to," Buhr said. "The investor appetite for the IPO is going to be pretty strong," he added.

BATS, headed by 45-year-old Joe Ratterman, was founded six years ago by major banks and trading firms looking to erode the oligopoly that NYSE and Nasdaq had over U.S. stock trading.

It now runs two securities exchanges and an options market, and handles more than 10 percent of all U.S. equities trading, it said in a Securities and Exchange Commission filing.

Ratterman is expanding overseas through a takeover of rival Chi-X Europe, which would create the largest pan-European trading venue.

The IPO will create publicly traded shares, generating a currency for potential future acquisitions, according to Friday's filing.

The two biggest exchanges are also looking to grow through mergers and acquisitions.

NYSE Euronext in February agreed to a friendly takeover by Germany's Deutsche Boerse (DB1Gn.DE); Nasdaq and IntercontinentalExchange Inc (ICE.N) launched a competing bid for the parent of the Big Board six weeks later. The Nasdaq and ICE bid is expected to become a hostile one in a few weeks.

Separately, Canada's TMX Group (X.TO) is pushing ahead with plans to tie up with the London Stock Exchange (LSE.L).

Exchange mergers would create stock-trading powerhouses that could cut costs and allow them to offer lower fees relative to other exchanges, making it harder for BATS to compete, it said in Friday's filing.

But CEO Ratterman is already seeking to turn the consolidation trend to his advantage with plans to enter the lucrative U.S. stock-listings business in the fourth quarter.

A Nasdaq-NYSE Euronext combination would have a monopoly in listing U.S. public companies, and BATS may hope capitalize on the dislike of monopolies by regulators and some customers.

BATS plans to list its common stock on its exchange under the "BATS" symbol.

TAKE A PASS

At least one well-known exchange investor said conflicts of interest at BATS would keep him away.

"We would pass," said Thomas Caldwell, chairman and founder of Toronto-based Caldwell Investment Management, which invests in global exchanges. "The major shareholders are highly conflicted," he said, because they are also BATS' biggest customers, and therefore have an interest in keeping trading fees down that is at odds with regular shareholders' interests in maximizing revenue.

Transaction fees from Morgan Chase & Co (JPM.N), Credit Suisse (CSGN.VX), trading firm GETCO and other BATS shareholders accounted for 32 percent of BATS revenue last year. Those investors will likely maintain control of the company post-IPO through a two-class system of shares that gives them five times the voting power of regular shareholders.

Morgan Stanley, one of the underwriters, owns more than 10 percent of BATS shares, also posing a conflict of interest, the filing noted. Credit Suisse and Citi (C.N), the other underwriters, are also shareholders.

BATS Global's filing said it planned to raise up to $100 million. However, the amount a company says it plans to raise in its initial IPO filings is just used to calculate registration fees. The final size of the IPO could be different.

(With reporting by Brenton Cordeiro in Bangalore; Editing by Vyas Mohan, Ian Geoghegan and Matthew Lewis)

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