Is Instinet (INET ) for sale? It's the No. 1 electronic communications network (ECN)--letting investors trade stocks directly. Whispers are that Goldman Sachs is in talks to buy Instinet, 63% owned by Reuters Group, a leader in financial info. One hedge-fund manager, who has bought shares and prefers not to be identified, says Reuters wants to focus on its information business. Standard & Poor's has downgraded Reuters' long-term debt out of concern Reuters may not bounce back soon. Instinet has cut prices, slashed staff by 20%, and closed its money-losing fixed-income-trading operations to stay profitable. Through a September purchase of its fiercest rival, Island ECN, Instinet upped its market share from 12% to 30%. Reuters says Instinet must cut 300 more jobs to reduce costs by $100 million. The cost-cutting has "stopped the bleeding," says John Marrin of Value Line, who notes Instinet made a 1 cents-a-share third-quarter profit.
"The hush-hush talks are likely to bear fruit because Goldman, whose own ECNs--Redi and Archipelago--are just half the size of Instinet, wants to dominate the ECN market," says another source close to the matter. By buying Instinet, Goldman's share would be nearly 50%. Trading at 3.76--down from a high of 19 in January, 2001--Instinet is worth 6 to 7 in a buyout, says this pro. "Goldman is determined to buy, and Reuters seems ready to sell," he argues. Thomson Financial/First Call estimates Instinet will break even in 2002, vs. making 72 cents a share in 2000 and 63 cents in 2001. It sees 17 cents in 2003. Both Goldman and Reuters declined comment.
Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Gene G. Marcial