Knight Decides: It's GETCO
Traders Magazine Online News, December 19, 2012
Knight Capital Group Inc.’s decision to pursue a takeover by GETCO LLC gives its shareholders, mostly Wall Street firms, an opportunity for stock appreciation while surrendering the certainty of cash.
Knight, pushed to the brink of bankruptcy in August by a trading error, chose GETCO’s proposal yesterday over a competing offer from Virtu Financial LLC, three people with direct knowledge of the matter said yesterday. The Chicago-based high- frequency trader offered $3.75 a share for Knight, one-third of it in stock, for a total price of $1.4 billion, according to a statement from Knight today.
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. While joining with GETCO preserves Knight’s listing and expands its reach, it also means the company’s value will depend on the view of markets, where GETCO has never traded.
“There’s an uncertainty,” Sachin Shah, a special situations and merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “Shareholders want to know that getting stock is attractive because it can appreciate. They need to articulate the future opportunity of the combined company. That will to some extent reduce the uncertainty so shareholders feel comfortable that it is not just paper, it’s valuable paper.”
Knight closed at $3.33 yesterday and climbed as high as $3.54 in after-hours trading.
GETCO, Knight and Virtu are designated market makers on the New York Stock Exchange or NYSE MKT. The takeover will make GETCO the largest with more than 1,400 NYSE companies, surpassing Barclay Plc, which has 1,200, based on data from the end of October. GETCO became a Big Board market maker in 2010. Virtu has the most companies on NYSE MKT, formerly known as the American Stock Exchange.
Sophie Sohn, a GETCO spokeswoman, and Knight’s Kara Fitzsimmons declined to comment yesterday. Alan Sobba, a spokesman for Virtu, also declined to comment.
Knight, led by Chief Executive Officer Thomas Joyce, lost more than $450 million in August when improperly installed software caused it to bombard share exchanges with unintended orders. GETCO and five other financial firms provided $400 million to restore Knight’s capital in return for convertible securities representing more than 70 percent of its equity.
Other rescuers were Blackstone Group LP, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp. and investment banks Stephens Inc. and Jefferies Group Inc. Virtu does not have a stake in the company.
The valuation of the combined firm depends on 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 the deal hard to evaluate, the price is more than owners would have received had no bidding contest occurred, he wrote.
“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 have garnered over the next year as stand- alone entity.”
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