Knight Capital Group Inc.’s (KCG:US) board plans to meet on Dec. 3 to resume assessing takeover offers from Getco LLC and Virtu Financial LLC, its second gathering in five days, according to a person with knowledge of the matter.
Directors yesterday evaluated bids submitted Oct. 28 without establishing a timeline for a decision, another person said. The group is considering its alternatives and hasn’t ruled out keeping the company independent, the person said. Both declined to be named because the discussions are private. The bids from closely held Getco and Virtu represent differing structures (KCG:US) and will force Knight to choose between cash and a value that depends in part on the stock market’s view of Getco.
The cash-and-stock bid from Chicago-based Getco values Knight at $3.50 a share and retains its public listing, according to a filing two days ago from the 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 firms in August after losing more than $450 million in a trading malfunction.
“It’s a very competitive marketplace,” Sang Lee, managing partner at Aite Group LLC in Boston, said in a phone interview. “The equities trading market has not been great the last three years. Given the issues Knight went through and the offers at hand, they have to make a decision. They’re viable offers.”
The bids pushed Jersey City, New Jersey-based Knight to its biggest rally in nine years as shares rose 37 percent to $3.42 in the three days ending Nov. 28, when the offers were submitted. Knight fell 1.8 percent yesterday to close at $3.36 and ended today at $3.37.
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 not to discuss shareholder activities. Alan Sobba, a spokesman for Virtu, Kara Fitzsimmons, a spokeswoman for Knight, and Getco’s Sophie Sohn declined to comment today on the board’s schedule.
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 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 is seeking to convince the board that Knight and its employees would be better off if the firm is restructured as a private company. New York-based Virtu would eventually go public, the person said.
The proposal would be financed by a loan commitment of at least $1 billion led by Credit Suisse Group AG, one person said. Barclays Plc and Citigroup Inc. would participate, according to another person. Virtu is in talks with three other banks and could raise an additional $100 million, that person said.
The bid also included a commitment of new equity financing from Silver Lake Management LLC, which owns a stake in Virtu, another private equity firm, and management of the market-making company, the person said. Virtu hasn’t been asked to increase its bid, the person said.
U.S. equity volume averaged 6.5 billion shares a day this year, down 17 percent from a daily average of 7.8 billion last year, according to data compiled by Bloomberg. Volume was 8.5 billion in 2010, the data show.
Knight, which owns the Hotspot FX and BondPoint platforms and is in more trading businesses than either of its suitors, 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.
While Virtu and Getco are primarily market makers, Getco started a customer business of providing algorithms, or trading strategies that break larger orders into smaller pieces bought or sold over a period of time, to institutions and brokers in 2011. That group executed an average of about 60 million shares a day over the last three months, Sohn said. It has about 50 customers including large money managers, she said.
Getco, like Knight, also operates a dark pool or private venue that doesn’t display prices publicly before transactions occur.
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 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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