Getco LLC, the Chicago-based high-frequency trader, offered to buy Knight Capital Group Inc. for cash and stock worth about $1 billion, setting the stage for a bidding war with Virtu Financial LLC that may end Knight’s 17-year history as an independent company.
The cash and stock transaction would pay holders of the Jersey City, New Jersey-based firm $3.50 a share, an 18 percent premium from yesterday’s close, and retain its public listing, according to a filing today from Getco. Virtu is preparing a cash takeover offer for Knight of about $3 a share, 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.
“If you’re involved in a share deal, then you’re betting that their market is going to continue to grow and there is an upside after the deal, whereas a cash-only deal, the upside is you’re taking cash, and cash now,” said Sang Lee, managing partner at Boston-based Aite Group LLC, in a phone interview. “It really depends on how the shareholders look at the market that all these firms are in.”
Knight’s stock rose 14 percent to $3.40 as of 12:54 p.m. in New York after surging 19 percent in the previous two sessions, the biggest rally since 2008. 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.
Knight declined to comment on Getco’s proposal, citing a policy to not discuss interactions with shareholders or shareholder activities, according to a statement from the company. Chris Concannon, an executive vice president at Virtu, didn’t respond to a call and e-mail seeking comment.
Getco’s offer would install CEO Coleman as head of the new company and make Knight CEO Thomas Joyce non-executive chairman. The offer is a 41 percent premium to the stock’s closing price on Nov. 23, the filing said.
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 then make a tender offer for up to 154 million Knight shares -- about half those outstanding, excluding Getco’s stake -- at $3.50, or about $539 million. Getco’s existing stake in Knight, about 57 million shares, would be retired.
“They think there’s long-term value in the company because they’re making a bid and because of how the warrants are structured,” Keith Ross, CEO of PDQ enterprises LLC, a Chicago-based dark pool operator, said in a phone interview. He was head of Getco from 2002 to 2005. “The warrants give them an incentive to help the company be profitable. This is an additional carrot.”
Virtu plans to assert in talks with Knight that the offer is more attractive than Getco’s bid because it is for all of Knight’s shares and is more likely to be completed, according to two people familiar with the matter who spoke on condition of anonymity because the talks are private. The proposal would be financed by capital contributed by Virtu’s owner, the private-equity firm Silver Lake Management LLC, and a loan commitment led by Credit Suisse Group AG, the people said.
Knight shares were trading 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 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.
“What happened with Knight made them more of a takeover target than other firms,” Adam Sussman, partner and director of research and Tabb Group LLC in New York, said in a phone interview. “It makes sense for the industry and the company. There’s an oversupply of capacity whether it’s on the market-making, execution or research side.”
Getco’s offer would result in no shareholder owning more than 20 percent of the combined company and most large shareholders would be under 10 percent, according to the filing today. The board of the combined company would include four directors nominated by former Getco shareholders and three directors currently on Knight’s board. Getco said it has lined up $950 million in financing for the deal.
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.
In an Aug. 6 interview, Getco’s Coleman 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, 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.