By Stephanie Ruhle, Zachary R. Mider & Nina Mehta - Dec 19, 2012 4:58 AM GMT+0400
Traders work at a Knight Capital Group Inc. post on the floor of the New York Stock Exchange (NYSE) in New York, U.S. An acquisition by Getco LLC would end the 17-year independence of Knight, a company propelled by the explosion in electronic trading in American stock markets. Photographer: Jin Lee/Bloomberg
Knight Capital Group Inc. (KCG), the Wall Street firm pushed to the brink of bankruptcy by a computer error four months ago, agreed to pursue a takeover by Getco LLC, three people with direct knowledge of the matter said.
Getco, the closely held high-frequency trader in Chicago, sweetened its proposal throughout the day and ended up offering $3.75 a share for Knight, with about two-thirds in cash and the rest in stock, said two of people, who requested anonymity because the negotiations were private. Knight, which decided against an all-cash offer from Virtu Financial LLC, closed at $3.33 and climbed as high as $3.54 in after-hours trading.
Traders work at a Knight Capital Group Inc. post on the floor of the New York Stock Exchange (NYSE) in New York, U.S. An acquisition by Getco LLC would end the 17-year independence of Knight, a company propelled by the explosion in electronic trading in American stock markets. Photographer: Jin Lee/Bloomberg
Knight Capital Chief Executive Officer Thomas Joyce. Photographer: Andrew Harrer/Bloomberg
Knight has transformed over the last decade from mainly handling orders by individuals sent by brokers into a financial services company with institutional clients, electronic trading and businesses in fixed income and currency. Photographer: Jin Lee/Bloomberg
| Sponsored Links | |||||||
| Buy a link | |||||||
An acquisition would end the 17-year independence of Jersey City, New Jersey-based Knight, a company propelled by the explosion in electronic trading in American stock markets. Joining with Getco would preserve the public listing and expand its reach beyond the U.S., creating an even bigger market maker in bonds and currencies as well as stocks.
“If I were a shareholder, I’d want it to continue on and would take a deal that allowed me to own some upside in a publicly traded security,” Kenneth Pasternak, who co-founded Knight in 1995, said in a phone interview from Ridgefield Park, New Jersey. “If you didn’t want to continue with Getco you could take the cash and sell the stock and probably get as much as Virtu is giving you.”
August Rescue
Sophie Sohn, a Getco spokeswoman, and Knight’s Kara Fitzsimmons declined to comment. Alan Sobba, a spokesman for Virtu, also declined to comment.
Knight, led by Chief Executive Officer Thomas Joyce, was bailed out by six financial firms including Getco in August after losing more than $450 million in a trading malfunction. Other firms that provided capital to Knight in August included Blackstone Group LP, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp. and investment banks Stephens Inc. and Jefferies Group Inc. (JEF) Virtu does not have a stake in the company.
The valuation of the combined firm depends in part on the stock market’s view of Getco, which is private and has made few financial disclosures, Patrick O’Shaughnessy, a New York-based analyst for Raymond James Financial Inc., wrote in a note to clients. While that makes it hard to judge, the deal is probably more than shareholders would have received had no bidding war occurred, he wrote.
Earnings Power
“Knight’s intermediate-term earnings power was significantly harmed due to share dilution related to its Aug. 1 trading error as well as depressed industrywide trading volumes,” he wrote. “As a result, we believe that an acquisition price of $3.75 per share greatly surpasses what Knight would likely havegarnered over the next year as stand- alone entity.”
Getco proposed a two-step reverse merger in November under which Knight would be reorganized as a holding company with Getco receiving newly issued shares and warrants. Getco would make a tender offer for a portion of Knight’s stock and retain the public listing, according to a proposal outlined in a government filing last month.
Virtu was offering to pay $3.20 a share to take Knight private, the Wall Street Journal reported earlier, citing unidentified sources.
Market Makers
Getco, Virtu and Knight are designated market makers on the New York Stock Exchange or NYSE MKT. After Barclays Plc, Getco is the largest by the number of companies it represents on the Big Board, according to NYSE Euronext. Knight is the fourth biggest. Virtu has the most companies on NYSE MKT, formerly known as the American Stock Exchange, and a few NYSE corporations. Knight is the second-largest designated market maker on the MKT exchange.
Automated market-maker Virtu in New York had asserted in talks with Knight that its offer was more attractive than Getco’s because it was for all of Knight’s shares and was more likely to be completed, according to a person familiar with the matter. Virtu had sought to convince directors that Knight and its employees would be better off if the firm is restructured as a private company. Virtu would go public later, the person said.
Liquidity Provider
“The most bang for the buck will be with Getco,” Ben Schwartz, the Chicago-based chief market strategist at broker Lightspeed Financial Inc., said in a phone interview. “They can consolidate as liquidity providers and they will be able to bring their technologies together to create a more efficient market.”
Knight had more than 1,545 employees at the end of September, it said in a regulatory filing. Getco had more than 400 in June after eliminating 40 jobs, according to a person with knowledge of the matter. Virtu has about 150 employees.
Knight shares were above $10 before the trading malfunction and bailout, which diluted existing owners by more than 70 percent. The company dodged bankruptcy almost four months ago when financial firms including Getco provided $400 million to restore the company’s capital after the trading malfunction, when incorrectly installed software caused it to bombard U.S. exchanges with unintended orders.
In the first half of this year, Knight’s market-making unit posted pretax earnings of $51.1 million, or 86 percent of the company’s total, according to a statement. Institutional sales and trading generated $7.2 million in the first six months of this year. Electronic execution services had pretax earnings of $23.6 million while the company’s corporate division had a loss of $22.5 million before taxes.
Knight Transformation
Knight has transformed over the last decade from mainly handling orders by individuals sent by brokers into a financial services company with institutional clients, electronic trading and businesses in fixed income and currency. It owns the Hotspot FX and BondPoint platforms, provides research and asset management and got into the reverse mortgage business in 2010.
“Getco was one of the six that bought Knight and they probably have insights into the company as part of that due diligence,” said Pasternak, who now works in the private equity industry. “An acquirer always thinks the acquired company is undervalued and they could do things differently that could enhance the value of the enterprise.”
To contact the reporters on this story: Stephanie Ruhle in New York at sruhle2@bloomberg.net;
Zachary R. Mider in New York at zmider1@bloomberg.net;
Nina Mehta in New York at nmehta24@bloomberg.net
To contact the editor responsible for this story: Lynn Thomasson atlthomasson@bloomberg.net
