GETCO Sweetens Offer for Knight Capital
December 18, 2012
Market Maker
Automated market-maker Virtu in New York has asserted in talks with Knight that its offer is more attractive than GETCO’s because it is for all of Knight’s shares and is more likely to be completed, according to a person familiar with the matter. Virtu has 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.
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.
Book Value
The ultimate value in combining Knight and GETCO may depend in part on whether the shares trade at a discount or premium to their book value, which GETCO estimated at $3.50.
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 has transformed over the last decade from mainly handling orders from 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.
Along with GETCO, founded in 1999, the firms that provided capital to Knight in August included Blackstone Group LP, brokerages Stifel Nicolaus & Co. and Ameritrade and investment banks Stephens Inc. and Jefferies Group Inc. Virtu does not have a stake in the company.
Knight would have about 365.5 million shares outstanding, including GETCO’s stake, should all of the stock issued in the August bailout be converted into common stock, Keefe Bruyette & Woods Inc. analyst Niamh Alexander estimated last month.
