* Getco sweetens offer to beat out rival Virtu
* With cash-and-stock offer, Getco to merge into Knight
* Offer is two-thirds cash, values Knight at $3.75 per share
* Deal comes after near-fatal trading error in August
By John McCrank and Jessica Toonkel and Jed Horowitz
NEW YORK, Dec 18 Getco Holding Company LLC will
buy Knight Capital Group for about $2 billion after
sweetening its offer for the equities market-making firm to beat
out rival Virtu Financial LLC, people close to the deal said.
Getco clinched the deal after it increased the amount of
cash in its cash-and-stock offer that will essentially see it
merge into Knight to create a new publicly traded company, the
The deal seals a whirlwind five months for Knight after a
near-fatal trading error on Aug. 1. The company, which executes
about 10 percent of U.S. equity trading volume, making it a
vital cog in the stock trading system, had to be rescued by a
$400 million injection from a group of investors led by
Jefferies Group Inc and including Chicago-based Getco.
The deal is two-thirds cash and values Knight at $3.75 a
share, the sources said.
Getco, an electronic trading firm that often competes
against Knight, will borrow $1 billion to execute the deal, they
said, adding that Knight's board had accepted the terms after
the markets closed on Tuesday.
Knight and Virtu declined to comment.
Getco had originally offered $3.50 a share for Knight in an
unsolicited bid that was 50 percent cash, and was helped by an
infusion from private equity firm General Atlantic, one of its
Knight shares rose 5.1 percent to $3.50 in after-hours
trading on the New York Stock Exchange after closing at $3.33.
"We never dreamed this would come about so quickly," said
Curt Bradbury, chief operating officer of Stephens, a Little
Rock Arkansas broker-dealer that took part in Knight's rescue.
"On the surface, the deals looks good, and I'm looking
forward to taking a closer look. We appreciate the board's
effort at sorting this out."
Jefferies, which agreed earlier this year to be bought by
Leucadia National Corp, worked with Getco on the deal
and is helping it with financing. At one point during the
negotiations, Jefferies' role raised concerns among some at
Knight about whether the investment bank was trying to push a
sale to make a quick buck. A Jefferies spokesman declined to
Other investors involved in the rescue included Blackstone
Group LP, TD Ameritrade Holding Corp, Stifel
Financial. General Atlantic, Blackstone and TD Ameritrade
took seats following the rescue on Knight's board.
NEW EXECUTIVE TEAM
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
Knight also 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
Getco is expected to divest most of Knight's noncore assets,
the sources said.
The latest discussions started after Getco made an
unsolicited bid late last month for Knight, which was followed
by Virtu's bid, also unsolicited.
Under Getco's proposal, Knight Chief Executive Thomas Joyce
will step down from that role, but will remain as executive
chairman of the combined company. Getco's Daniel Coleman will
become the CEO of the combined firm.
Knight's board was initially split on the relative merits of
the competing bids, the sources said.
Virtu this week boosted its all-cash bid to $3.20 a share,
one of the sources said, leaving Knight to weigh the value of
cash against what stock in a newly combined Getco-Knight would
Knight's directors were also divided over the future
management and financial health of the company, sources said.
The board questioned Getco's motivations, worrying that,
with its profit down 60 percent this year, it was scrambling to
find a stronger partner, one source said.
The board also had questions about Virtu's debt load,
another source said. Virtu had lined up some financing for its
bid from private equity firm Silver Lake, a Virtu investor.
One concern for brokerages such as TD Ameritrade was whether
the new owner would continue to pay discount brokers to route
orders through Knight in order to create liquidity for the
market, the sources said. That also became a point of discussion
for Knight's board as it debated the rival bids, they said.
On Aug. 1, Knight's errant software sent millions of
unintentional orders in almost 150 stocks in the opening 45
minutes of the U.S. trading session.
Knight ended up selling the shares it purchased at a large
discount to Goldman Sachs Group Inc, leading to a $461.1
million loss that overwhelmed the $365 million of cash on its
books. In the wake of the debacle, its stock, which had traded
at a high of $13.59 this year, fell to as low as $2.58.