Getco LLC sweetened its offer to acquire Knight Capital Group Inc. as the market maker’s board prepares to decide between competing bids, according to a person with knowledge of the matter.
The Chicago-based high-frequency trader raised the cash element of its proposal to $3.60 a share for 60 percent of Knight, up from $3.50 for 50 percent, said the person, who asked not to be named because the talks are private. Virtu Financial LLC, the other suitor, is offering to pay $3.20 a share to take Knight private, the Wall Street Journal reported, citing unidentified sources. Directors of Knight will probably decide within days which suitor to back, another person said yesterday.
Getco and Virtu, rivals seeking to acquire the market maker four months after it lost more than $450 million in a computer malfunction, are the only bidders for Jersey City, New Jersey-based Knight, one of the people said yesterday. The offers represent divergent structures for the company led by Chief Executive Officer Thomas Joyce, forcing Knight to choose between immediate cash from Virtu and a value that depends in part on the stock market’s view of Getco.
CNBC reported Getco had boosted its cash offer to $3.60 a share earlier. Knight’s shares climbed 2.8 percent to $3.35 as of 2:13 p.m. in New York. They’ve rallied 35 percent since the bids were first reported Nov. 23.
Getco’s cash and stock offer would keep Knight public. Knight was bailed out by six financial companies in August, its capital depleted after malfunctioning computers bombarded exchanges with orders.
Kara Fitzsimmons, a spokeswoman at Knight, Getco’s Sophie Sohn and Alan Sobba, a spokesman for Virtu, declined to comment.
Goldman Sachs Group Inc. is assisting with Virtu’s financial, according to a person with knowledge of the matter. Credit Suisse Group AG, which had previously been in talks to lead Virtu’s financing, is no longer in that role, another person said.
Knight, Getco and Virtu 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. by executing buy and sell orders for individuals. Neither Getco nor Virtu is in that business.
Getco is proposing a two-step reverse merger under which Knight would be reorganized as a holding company. Under the revised proposal, cash would represent about 60 percent of the takeover value, with the rest in shares of the combined firm.
Automated market-maker Virtu in New York has 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 has sought to convince directors that Knight and its employees would be better off if the firm is restructured as a private company. Virtu would go public later, the person said.
Knight 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 employees.
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 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.
The ultimate value in combining Knight and Getco may depend in part on whether the shares trade at a discount or premium to their book value, which Getco estimated at $3.50.
In the first half of this year, Knight’s market-making unit posted pretax earnings of $51.1 million, or 86 percent of the company’s total, according to a statement. Institutional sales and trading generated $7.2 million in the first six months of this year. Electronic execution services had pretax earnings of $23.6 million while the company’s corporate division had a loss of $22.5 million before taxes.
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.
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 does not have a stake in the company.
Knight would have about 365.5 million shares outstanding, including Getco’s stake, should all of the stock issued in the August bailout be converted into common stock, Keefe Bruyette & Woods Inc. analyst Niamh Alexander estimated last month.