* Knight shares rise 5.4 percent
* Deal expected to close in late April, early May
* Getco, Knight chiefs working on new strategic plan
* New board to have five members from Getco, four from
By John McCrank
Dec 19 Knight Capital Group Inc, which
nearly collapsed in August following a software glitch, is being
bought by rival automated trading firm Getco Holding Co in a
cash-and-stock transaction that values Knight at around $1.4
billion and creates a dominant player in the industry.
The deal, expected to close in late April or early May, ends
weeks of speculation about whether Knight would retain its
independence or be acquired by Getco or Virtu Financial LLC.
Knight is a top U.S. market maker, using computer models to
match buy and sell orders in stocks and options, executing
around 10 percent of U.S. equity trading volume. Getco also has
market making operations, and is one of the biggest
high-frequency trading firms.
"We will ultimately end up with a very formidable player in
the automated trading market," said Aite Group analyst Sang Lee.
Knight's other operations include foreign exchange and bond
trading platforms, as well as a stake of around 20 percent in
No. 4 U.S. equities exchange Direct Edge. Getco is also a big
player in the automated trading FX market and has been building
up its agency brokerage operation over the past few years.
Getco head Daniel Coleman will be chief executive of the
new, as-of-yet unnamed, company, and Knight CEO Tom Joyce will
be executive chairman. The two said on Wednesday they had begun
work on a new strategic outlook for the firm, which will be
"Tom and I are going to review all of the businesses,"
Coleman said in an interview. There were obvious areas of
duplication between Getco and Knight, which will lead to
sizeable cost savings for the combined firm, he added.
Knight closed up 5.4 percent on Wednesday at $3.51.
Knight shareholders other than Getco will have the right to
pick either $3.75 per share in cash or one share of common stock
in the new business.
The offer represents a 13 percent premium to Knight's
closing stock price of $3.33 on Tuesday. It's also a 51 percent
premium to Knight's closing price on Nov. 23, when reports
surfaced that the company was a possible takeover target.
But it was well below Knight's closing price of $10.33 on
July 31, the day before errant software at the Jersey City-based
firm sent millions of unintentional orders to the market over a
45 minute period, leaving Knight with a huge position it had to
unload at a loss totaling $461.1 million.
With its capital largely depleted, Knight secured $400
million in rescue financing by a group of investors that
included Chicago-based Getco and was led by Jefferies Group Inc
, in exchange for a more than 70 percent stake in the
Jefferies later worked with Getco on the deal to buy Knight
and is helping it with financing.
PUBLIC VS PRIVATE
Getco made its unsolicited bid for Knight late last month,
which was followed by Virtu's bid, also unsolicited. Unlike
Getco's proposal, Virtu's all-cash offer that topped out at
around $3.20 a share, according to sources, would have taken
"Because of what we've learned over the course of the due
diligence process, we certainly came to appreciate the mutual
assets each company had," Joyce said in an interview of Getco.
"I think it's kind of cool that the company will still stay
public and give shareholders the opportunity to take part in the
upside, because it looks to me like the upside is potentially
significant," he said.
Knight investors with the Jefferies and Getco group have
agreed to limit the cash they take in the current deal to 50
percent of their Knight shares so that other stockholders can
receive up to $720 million in cash. If requests for cash top
$720 million, they will be pro-rated.
Getco will borrow $1 billion to provide the cash for the
exchange offer, as well as to refinance the various debts of
both companies, Coleman said.
The new board will have nine members, with five from Getco
and four from Knight.
Apart from Getco, the summer rescue group led by Jefferies
included Blackstone Group LP, TD Ameritrade Holding Corp
, Stifel Financial, and Stephens Inc.
Getco investor General Atlantic, as well as Blackstone and
TD Ameritrade, were given seats on Knight's board as part of the