Knight Capital Group Inc. (KCG:US) expects to receive acquisition proposals as early as this week, according to a person with direct knowledge of the matter.
The company with a market value of about $430 million was bailed out by six financial firms in August after losing $457 million in a trading error. Chicago-based Getco LLC, one of the rescuers, and Virtu Financial LLC in New York are among the likely bidders, said the person, who requested anonymity because the negotiations are private. The Wall Street Journal reported Nov. 23 that Knight expected offers for its market-making unit.
An acquisition would end Knight’s independence following more than a decade in which Chief Executive Officer Thomas Joyce built it into one of the biggest market makers, executing about 10 percent of U.S. share volume. Joyce sent an e-mail to employees over the weekend saying capital levels are strong and no deal will be done unless it makes sense for the company, according to a person briefed on the matter who asked not to be named.
“Getco and Virtu would definitely be interested in the market-making business and the retail order flow,” Richard Repetto, a New York-based analyst at Sandler O’Neill & Partners LP, said in a Nov. 24 phone interview. “If they sold the market-making business, it would make sense to sell simultaneously the other assets to them or somebody else. They don’t have a company once they sell that business. It’s the mainstay.”
Kara Fitzsimmons, a Knight spokeswoman, Sophie Sohn, a spokeswoman for Getco, and Douglas Cifu, president and chief operating officer of Virtu, declined to comment.
Knight surged 16 percent to $2.89 as of 3:39 p.m. in New York, poised for the biggest gain since August.
Offers for Jersey City, New Jersey-based Knight are expected this week with negotiations for an acquisition occurring as early as next weekend, according to the person. The successful bidder would emerge as a bigger competitor in the business of providing buy and sell requests for stocks and other securities and reap cost benefits, the person said.
Knight dodged bankruptcy in August when six financial firms 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. The investors, which received three board seats as part of the transaction, control Knight through preferred stock convertible into more than 70 percent of the common shares.
Getco said in a filing (KCG:US) this month that it will consider transactions including buying or selling Knight shares.
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. Knight had more than 1,400 employees at the end of last year, it said in a filing.
Knight doesn’t need a deal and would only entertain transactions that made sense for the company and its business units, according to Joyce’s e-mail. His contract expires at the end of the year.
The company had $420.8 million in cash and equivalents as of Sept. 30, according to its earnings report released last month. The company posted a third-quarter net loss (KCG:US) of $6.30 a share, the widest since at least 2001.
Virtu, Getco and Knight are automated market makers. While Getco and Virtu operate across asset classes mainly on exchanges and similar platforms around the world, Knight is also a wholesale market maker that services retail brokers including Fidelity Investments and TD Ameritrade Holding Corp. by executing buy and sell orders for individuals.
In an Aug. 6 interview, Daniel Coleman, chief executive officer of Getco, said Knight’s disappearance wouldn’t have yielded a “better world” for Getco. Without Knight’s ability to provide liquidity, “it would be more expensive for everyone to trade,” he said in a phone interview.
“In some ways Knight’s a competitor, in some ways they’re a client, in some ways we’re their client,” Coleman said. “But at the end of the day the liquidity they provide and I think the liquidity we provide probably makes both of us better. This is in our strategic interest to make sure Knight stays viable.”
Along with Getco, founded in 1999, the firms that provided capital to Knight in August included Blackstone Group LP (BX:US), brokerages Stifel Nicolaus & Co. and Ameritrade and investment banks Stephens Inc. and Jefferies Group Inc. Virtu, based in New York, does not have a stake in the company.
Knight shares, which closed at $10.33 the day before the trading error, ended trading last week at $2.49.
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