Archipelago to Acquire Pacific Exchange’s Parent

Archipelago Holdings Inc., a publicly traded owner of an electronic stock exchange, said Tuesday that it would move into options trading by acquiring the parent of Pacific Exchange Inc. for $50.7 million.

The purchase would diversify Chicago-based Archipelago beyond trading stocks, where volume across markets was little changed last year. Options trading, by contrast, was 27% busier in 2004 than 2003, according to Options Clearing Corp. The Pacific Exchange lists more options on the stocks of more than 1,100 companies such as DreamWorks Animation SKG Inc.

“Getting into a high-growth, high-volume industry is very attractive to us,” Archipelago Chief Executive Gerald Putnam said on a conference call with reporters and analysts. “There’s a big opportunity here.”

The Pacific exchange, which was founded in 1862, once had equities exchange floors in Los Angeles as well as San Francisco, but now operates only in San Francisco, with about 200 traders.

It installed an electronic trading platform in 2003 and may shut its physical trading floor by 2006, said Chief Executive Philip DeFeo. The exchange was the fifth-busiest options market in 2004, handling 8.7% of all options trading, according to the OCC.

“We live in a world where there are no guarantees,” said DeFeo, who will earn about $2.3 million from the sale. “We’d like to think we could reinvent ourselves and become something we’re not, but history has taught us that’s very difficult to do.”

Among competitors, DeFeo singled out the International Securities Exchange, which plans a public offering early this year. Just 4 years old, its market share was 30.5% last year, versus the Chicago Board Options Exchange’s 30.6%.

Chicago-based Archipelago will pay $40.6 million in cash and $10.1 million in stock for PCX Holdings Inc., the companies said in a statement. Pacific shareholders are selling at a premium: They’ll receive about $83.74 a share, more than double the last sale of $34 on Dec. 29.

The transaction will have little effect on Archipelago’s earnings this year and add to profit beginning in 2006, Chief Financial Officer Nelson Chai said.

The purchase, which is expected to close this year, is Archipelago’s first since its August initial public offering and the company will be “opportunistic” regarding other acquisitions, Putnam said. The company paid $40 million in cash to take over the Pacific Exchange’s equity business in 2000. Today, the Pacific Exchange owns 3.5% of Archipelago’s common stock, according to an Archipelago filing with the SEC.

Archipelago shares fell 5 cents to $20.25 on the Pacific Stock Exchange.

Archipelago, founded in 1996, executed 295.1 million U.S. equity transactions last year, according to the company’s SEC filings.