Gooch Hustles for Other GFI Bids as Lutnick’s Takeover Looms

Mickey Gooch isn’t ready to sell the interdealer brokerage he founded 28 years ago to his longtime rival, Howard Lutnick.

Lutnick is close to winning the support of 45 percent of shareholders, the amount he said his BGC Partners Inc. needs to complete a hostile offer for Gooch’s GFI Group Inc. Now Gooch is reaching out to competitors ICAP Plc and Tullett Prebon Plc in an attempt to find an alternative, according to people with direct knowledge of the matter.

Lutnick appeared to have won a six-month bidding war when exchange operator CME Group Inc. withdrew its takeover offer for GFI on Jan. 30. Gooch, 56, might be out of a job if Lutnick succeeds in his tender offer, said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Ridgewood, New Jersey.

“His options are limited and the deadline is looming, so he’s surely scrambling,” said Lieberman, whose firm owns stock in BGC.

Lutnick, 53, who also runs brokerage Cantor Fitzgerald LP, set a Feb. 19 deadline for his offer of $6.10 per share, though he has already pushed back that date six times. He said 43 percent of shareholders have accepted his deal, including the 13 percent owned by BGC.

Motivations Questioned

Gooch, who declined to comment for this story, has questioned Lutnick’s motivations and the seriousness of the offer. Lutnick has said that Gooch has been misleading investors about BGC’s offer because he wanted to buy the brokerage business himself, as the CME deal would have allowed. Lutnick said his proposal is serious and he’s ready to complete the deal quickly.

A combination of BGC and GFI would create the world’s largest interdealer broker by revenue, according to data compiled by Bloomberg. At both companies, brokers handle large trades of derivatives and bonds for banks, and also run electronic-trading platforms that can be similar to exchanges.

BGC’s bid isn’t opposed by all of GFI’s five-member board. When the panel recommended against BGC’s bid and decided to instead explore other options, it lacked the votes of two independent directors, according to e-mails disclosed Feb. 4 in a Delaware Chancery Court lawsuit. The lawsuit claimed that Gooch has breached his fiduciary duties by favoring the CME deal.

Restart Process

GFI is trying to restart the sales process, and CME and Lutnick have been invited to bid again, according to the people, who asked not to be identified because the talks are confidential. GFI would like to complete the process within a month, they said.

“GFI has been approached by parties expressing interest in exploring transactions that could include a potential sale of GFI,” the company said in a regulatory filing Thursday. “The Board has authorized GFI management to explore these potential transactions as well as to engage in discussions with other parties that could lead to other potential transactions.”

GFI is considering selling the whole company or just the software businesses that CME had wanted, the people said. The company has contacted Deutsche Boerse AG and Intercontinental Exchange Inc. about those units, called Trayport and Fenics, according to the people.

Spokesmen for all the potential bidders declined to comment or didn’t respond to messages.

The back and forth started in July, when CME said it would buy GFI for $4.55 per share. CME, owner of the world’s biggest futures market, said it would keep some of GFI’s trading software and sell its main brokerage business back to a group led by Gooch. Lutnick, who said he had wanted to buy GFI for years, said it struck him as unfair.

‘Backward’ Takeover

“Management did a sort of backward insider takeover,” Lutnick said in a Feb. 2 interview on Bloomberg Television. “I thought, ‘You’ve got to be kidding me.’”

BGC made a higher offer directly to GFI shareholders, setting off a series of bids that ended when investors voted down CME’s final proposal of $5.85 a share.

Gooch has said he doesn’t want to sell to BGC because he doesn’t trust Lutnick. Lutnick might use the due diligence process to see which of GFI’s salesmen are the most profitable, then back out of the takeover and hire them for himself, Gooch said in a Jan. 29 letter to shareholders.

“I urge you NOT TO BE FOOLED,” Gooch wrote.

Losing employees isn’t an idle worry among interdealer brokers, who handle large trades for banks without tipping off others to their positions. The business has traditionally depended on salesmen developing relationships with customers over steaks, baseball games and sometimes less wholesome forms of entertainment.

Broker Poaching

Brokers hire the salesmen away from each other with multimillion-dollar bonuses, expecting they’ll bring the clients along. BGC agreed in January to a $100 million settlement with Tullett Prebon over poaching claims.

“Howard Lutnick does have a reputation of being aggressive and getting in the way of things he doesn’t want to happen,” said Sean O’Neill, director of research at Doheny Asset Management LLC in Los Angeles, which invests in both GFI and BGC. “It wouldn’t surprise me at all if he got the tender, poached a few top brokers, and then forced a renegotiation of the deal.”

BGC may claim that some of the conditions of its offer weren’t met, even if it gets enough votes, Gooch said. In addition to 45 percent support from shareholders, BGC has also said its wants two-thirds of GFI’s board seats.

‘An Out’

“There’s conditions to the offer for sure,” said Niamh Alexander, an analyst at New York-based brokerage Keefe, Bruyette & Woods. “They still have an out.”

Gooch and Lutnick are still the largest investors in the firms they built. Lutnick gained control of Cantor Fitzgerald in a legal battle with its founder’s widow, then rebuilt it after most of its U.S. employees were killed in the Sept. 11, 2001, attacks on New York’s World Trade Center. BGC was spun off in 2004.

Gooch, who was born in England, moved to New York while working for a predecessor to Tullett Prebon, according to a 2008 article in the Daily Telegraph.

He founded GFI in 1987 and his share of the company grew to be worth more than $1 billion at one point, the article said. Gooch still controls 36 percent of the company through Jersey Partners Inc., his investment firm, though that stake is now worth about $280 million, according to data compiled by Bloomberg.

Less Competition

With trading by banks declining since the 2008 financial crisis, the interdealer brokerage business has suffered, leading to consolidation. A potential merger between GFI and Tullett fell apart in 2008. The industry would benefit from less competition, Michael Spencer, ICAP’s chief executive officer, said last year.

Consolidation “would be something that we would welcome absolutely,” Spencer said during a September conference call when asked about the GFI situation.

GFI is probably worth the most to a competitor who can cut costs by eliminating overlapping management and infrastructure, KBW’s Alexander said.

“At some point, this company is probably going to sell,” Alexander said. “Doing nothing is not really an option.”

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