Virtu Financial LLC submitted a bid for troubled Knight Capital Group that rivals one made by Getco LLC, in what appears to be the beginning of a bidding war for the largest ETF market maker in the world.
Virtu is proposing an all-cash transaction that values Knight at $3.00 a share, while Getco is serving up a two-stage proposal that involves $3.50 in cash for about half of Knight’s shares plus shares in any new Getco-Knight entity, according to a story published in the Wall Street Journal. Both deals value Knight from $1.4 billion to $1.8 billion, including debt.
The prospect of a sale of Knight follows by about four months a trading fiasco on Aug. 1 caused by a software problem that wiped out the company’s profits and brought it to the brink of insolvency. The software problem caused a multitude of trades to execute automatically in minutes, instead of days or even weeks, market sources told IndexUniverse at the time.
With Knight now apparently vulnerable, firms such as Getco and Virtu are interested in its market-making unit—a big part of which is focused on ETFs. And ETF trading now routinely makes up a third of the volume on U.S. exchanges by dollar value and 40 percent when markets turn volatile, according to a study conducted by IndexUniverse.
In any case, the emergence of Chicago-based Getco and New York-based Virtu as Knight suitors is exactly what the Journal said last weekend was taking shape behind the scenes.
Knight is said to be discussing the rival bids at a special meeting today, though it’s hardly clear if the outcome will be known today. Moreover, Knight was said to be interested in shopping the company’s assets around to other potentially interested parties, which could mean this takeover tale may take some more twists and turns.
Knight, apart from a terse acknowledgment yesterday that it had received a buyout proposal from Getco, hasn’t said anything else.
“As a matter of policy, Knight does not comment on interactions with shareholders or shareholder activities including filings,” the company said today in the press release.
The initial Journal report last weekend fueled a nearly 19 percent jump in Knight Capital Group’s (NYSE: KCG) stock on Monday, and on Wednesday, Jersey City, N.J.-based Knight’s shares rose another 15 percent to end the session at $3.42 a share.
One basic difference in the proposed Getco and Virtu transactions as they now stand is how they handle the fate of Knight’s chief executive officer
On the one hand, the Getco transaction contemplates that Getco CEO Daniel Coleman would lead the new company, and that Knight’s Joyce would become nonexecutive chairman, according to a regulatory filing.
On the other hand, Joyce would end up as the CEO of Virtu should it win the takeover battle.
The Getco proposal values Knight at between $1.4 billion and $1.8 billion, while the Virtu plan values Knight between $1.5 billion and $1.6 billion.
Getco made its proposal public in a filing yesterday, while the Virtu transaction remains a nonpublic, back-channel affair, the Wall Street Journal said.
Limping To The Finish Line
Notwithstanding the importance of Knight’s market-making unit, the company may have been more badly hurt by last summer’s trading fiasco than is commonly understood.
The firm had pretax profits of $663.8 million from 2009 to 2011, but posted a $400.9 million loss in the first nine months of the year because of the trading glitch.
The firm received a $400 million capital infusion in the wake of the crisis by selling convertible preferred stock.
Knight posted a third-quarter loss of almost $390 million.
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