Knight Capital Group Inc.’s (KCG:US) board is scheduled to meet today after receiving takeover proposals from Getco LLC and Virtu Financial LLC., according to a person familiar with the situation.
Directors of the Jersey City, New Jersey-based company are mapping their response to the offers, which came yesterday and helped push the stock (KCG:US) to its biggest rally in nine years, according to the person, who requested anonymity because the negotiations are private.
The offers from closely held Getco and Virtu represent differing structures (KCG:US) and will force Knight’s board to choose between cash and a value ascribed in part by the stock market’s view of Getco. Kara Fitzsimmons, a Knight spokeswoman, declined to comment.
“This isn’t a done deal,” Adam Honore, research director at Boston-based Aite Group LLC, said in a phone interview yesterday. “The odds are pretty good it’s going to be a like firm from a business model perspective, and there will be cost savings to be achieved and that would include employees.”
Getco’s cash and stock bid values Knight at $3.50 a share and retains its public listing, according to a filing yesterday from the Chicago-based high-frequency trading firm. Virtu is pursuing a deal to buy Knight for about $3 a share in cash, a person with direct knowledge of the matter said. Knight was bailed out by six financial companies in August after losing more than $450 million in a trading malfunction.
Shares of Knight closed at $3.36 in New York, down 1.8 percent. They rose 15 percent to $3.42 yesterday, bringing the three-day rally to 37 percent, the most since 2003.
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 focuses on U.S. equities. It’s also a wholesale market maker that services hundreds of retail brokers including Fidelity Investments and TD Ameritrade Holding Corp. (AMTD:US) by executing buy and sell orders for individuals. Getco and Virtu aren’t in that business.
Knight has declined to comment on Getco’s proposal, citing a policy to not discuss shareholder activities, according to a statement from the company. Doug Cifu, president and chief operating officer of New York-based Virtu, declined to comment yesterday.
Getco is proposing a two-step reverse merger in which Knight would be reorganized as a holding company with Getco receiving 242 million newly issued shares and warrants to buy 69 million more. The company would make a tender offer for as many as 154 million Knight shares -- about half those outstanding, excluding Getco’s current stake -- at $3.50, or about $539 million. Getco’s existing stake in Knight, about 57 million shares, would be retired.
Automated market-maker Virtu plans to assert in talks with Knight that the offer is more attractive than the bid announced yesterday by Getco because it is for all of Knight’s shares and is more likely to be completed, according to two people familiar with the matter.
The proposal would be financed by capital contributed by Silver Lake Management LLC, which owns a stake in Virtu, other private equity firms and individuals, and a loan commitment of at least $1 billion led by Credit Suisse Group AG, another person said. All three spoke on condition of anonymity because the talks are private.
Knight shares were above $10 prior to the trading malfunction and bailout, which diluted existing owners by more than 70 percent. The company dodged bankruptcy almost four months ago when six 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.
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