While Knight Capital Group Inc. (KCG:US) Chief Executive Officer Thomas Joyce helped steer the company from insolvency, the company’s travails have come at a personal cost of $17 million.
Joyce, who held 1.3 percent of Knight as of Jan. 31, bears the biggest loss in a group of executives (KCG:US) who own 1.8 percent of the company’s tradable shares, according to data compiled by Bloomberg based on holdings from government filings. The $400 million bailout of the firm that handles about 10 percent of market making in U.S.-listed stocks reduces the stake of existing shareholders by more than 70 percent.
Knight shares plunged 70 percent since a programming malfunction spewed orders through exchanges Aug. 1 and saddled the company with a $440 million loss. The rescue means firms including Jefferies Group Inc. (JEF:US), Blackstone Group LP and TD Ameritrade Holding Corp. own a controlling stake in the Jersey City, New Jersey-based market maker. Joyce’s ownership compares with 6 percent of Jefferies stock for CEO Richard B. Handler, data compiled by Bloomberg show.
“Management ownership, although it doesn’t guarantee success, is an important ingredient,” Eric Marshall, co-manager of the Hodges Small Cap Fund and the director of research at Hodges Capital Management Inc., said by phone from Dallas yesterday. Hodges has about $700 million in assets. “That’s something we put a lot of consideration to, especially in the financial services industry.”
Kara Fitzsimmons, a Knight spokeswoman, declined to comment on the insider holdings in an e-mail yesterday. She declined to make the executives available for interviews.
The proportion of tradable shares owned by Knight executives compares with a median of 5.9 percent for brokerages and investment banks in the Russell 3000 Index (RAY), Bloomberg data show. The Knight proportion goes up to 4.2 percent including shares that have been issued and can’t be sold, with Joyce responsible for about 57 percent of the total, according to data compiled by Bloomberg and Princeton, New Jersey-based InsiderScore.com.
Knight’s market value (KCG:US) was $301.5 million, compared with the $820 million paper value for the 267 million shares represented by convertible securities based on yesterday’s closing price.
Stock owned by George Sohos, the head of market making, has fallen by $4.7 million since July 31, according to data on tradable and restricted shares compiled by Insiderscore and Bloomberg. Steven Sadoff, Knight’s global head of operations, saw his stake slump by $3.4 million. The value of the stake held by Chief Financial Officer Steven Bisgay, who owns 117,495 tradable shares and 139,177 restricted, declined by $1.9 million, the data show.
Knight shares (KCG:US) tumbled 24 percent to $3.07 in New York yesterday as investors prepared for hundreds of millions of shares to enter the market via convertible securities.
“It’s possible that if management had a larger stake in the company, that they could have gone for a tougher deal,” Michael Wong, a Chicago-based analyst with Morningstar Inc., said in a telephone interview, referring to the bailout Knight received. “That said, it was an emergency situation. Joyce came out and said it was the best deal that could be struck.”
Six of Knight’s seven board members (KCG:US) are independent and own shares, according to data (KCG:US) compiled by Bloomberg from government filings. Companies in its exchanges and brokerages peer group have 11 board members on average that include nine independent directors and 10 people that own shares, the data show.
New Board Members
Joyce said in a telephone interview yesterday he faced too many risks to make Knight’s equity price a top priority as he negotiated the bailout. Diluting shareholders to save the company was “the right thing to do” and he intends to continue running the firm, he said.
Knight said in a statement yesterday it will add three members to its board. One will be selected by Blackstone, another by General Atlantic LLC, and one member will be subject to approval by Jefferies, according to a filing (KCG:US) with the SEC.
“As big as the hit was, I think it’s good the shareholders were able to survive with something,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said by phone yesterday. “It’s to the credit of the organization that they were able to get it done.”
The dilution to its equity leaves “very little” for existing shareholders, while likely ensuring the company’s survival, analysts (KCG:US) at JPMorgan Chase & Co. wrote in an Aug. 6 note. They predicted Knight eventually may be broken up.
Jefferies conceived and structured the $400 million investment and bought shares along with Getco LLC and Blackstone, brokerages Stifel Nicolaus & Co. and TD Ameritrade, as well as the investment bank Stephens Inc. Jefferies’ Handler holds 12 million shares of the company, Bloomberg data show.
“Firms who know Knight well saw this for what it was, an unfortunate, one-off tech problem,” Roger Freeman, a New York- based analyst with Barclays Plc, wrote in an e-mail. Still, “there aren’t big employee stakes at this company.”
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