NEW YORK Knight Capital Group's (KCG.N) board on Tuesday agreed to sell the equities market-making firm to Getco Holding Company LLC, said people close to the transaction.
Knight, which executes options and stock trades for other brokerage firms, had been in negotiations with Getco and Virtu Financial LLC, high-frequency trading firms that often compete with clients of Knight. Knight executes about 10 percent of U.S. equity trading volume, making it a vital cog in the stock trading system.
Chicago-based Getco increased the amount of cash in its cash-and-stock offer to around $2 billion, or more than $3.60 a share, helped by an infusion from private equity General Atlantic, its principal investor.
Jefferies Group Inc JEF.N, which helped rescue Knight last summer after a near-fatal trading glitch, also is helping to finance Getco's bid,
Virtu had boosted its all-cash bid to $3.20 a share, a source said, leaving Knight's board to weigh the value of cash against what stock in a newly combined Getco-Knight would be worth. Knight shares closed on the New York Stock Exchange Tuesday up 2.1 percent at $3.33.
A spokeswoman at Knight and a spokesman at Virtu declined to comment. Spokespeople at Getco and Jefferies were not immediately available.
Knight's directors were divided not only over value but over the future management and financial health of the company, sources said. Under Getco's proposal, Knight Chief Executive Thomas Joyce will step down from those roles.
Under Getco's initial proposal, Joyce would serve as nonexecutive chairman of the combined company while Getco CEO Daniel Coleman would run the firm day to day.
The board debated whether Getco and Virtu would keep Knight's model of paying discount brokerage firms such as Charles Schwab Corp (SCHW.N) and TD Ameritrade Holding Co (AMTD.N) for the orders that it needs to make liquid markets for other brokerage firms.
The board also questioned Getco's motivations, worrying that, with its profit down 60 percent this year, it was scrambling to find a stronger partner, one source close to Virtu said. Another source close to Getco said the board had questions about Virtu's debt load.
Virtu had lined up some financing for its bid from private equity firm Silver Lake, a Virtu investor, separate sources said.
Spokeswomen for Knight and Getco, and a spokesman for Virtu, declined to comment.
MARKET-MAKING BUSINESS EYED
Both Getco and Virtu coveted Knight's U.S. market-making business, which uses computer models to match buy and sell orders in stocks and options. Knight's market-making has remained profitable despite a market-wide slump in equities volume, though its profits have been eroded by ventures into other areas.
Getco and Virtu have market-making units that compete against Knight.
Knight runs bond and foreign exchange trading platforms, and owns a reverse mortgage lender as well as a stake of about 20 percent in Direct Edge, the No. 4 U.S. cash equities exchange.
Getco is expected to divest most of Knight's noncore assets, said several people close to the company.
The Jersey City-based firm's software glitch in August brought it to the brink of bankruptcy, leading a group of investors to step in with $400 million in emergency capital.
The rescue was led by Jefferies and included Getco, Blackstone Group LP (BX.N), TD Ameritrade, Stifel Financial (SF.N), and Stephens Inc.
General Atlantic, Blackstone and TD Ameritrade took seats following the rescue on Knight's board, but General Atlantic's representative recused himself from takeover negotiations, sources said.
The latest discussions started after Getco made an unsolicited bid late last month for Knight, which was followed by Virtu's bid, which was also unsolicited.
(Reporting By John McCrank and Jessica Toonkel; Editing by Muralikumar Anantharaman, Andrew Hay and Gunna Dickson)