Knight shares were above $10 prior to the trading malfunction and bailout, which diluted existing owners by more than 70 percent. The company dodged bankruptcy almost four months ago when six financial firms, including Getco, provided $400 million to restore the company’s capital after the trading malfunction, when incorrectly installed software caused it to bombard U.S. exchanges with unintended orders.
“What happened with Knight made them more of a takeover target than other firms,” Adam Sussman, partner and director of research and Tabb Group LLC in New York, said in a phone interview. “It makes sense for the industry and the company. There’s an oversupply of capacity whether it’s on the market- making, execution or research side.”
Getco’s offer would result in no shareholder owning more than 20 percent of the combined company and most large shareholders would be under 10 percent, according to the filing today. The board of the combined company would include four directors nominated by former Getco shareholders and three directors currently on Knight’s board. Getco said it has lined up $950 million in financing for the deal.
The ultimate value in combining Knight and Getco will depend in part on whether the shares trade at a discount or premium to their book value, which Getco estimated at $3.50, Christopher Allen, an analyst at Evercore Partners Inc. in New York, said in a phone interview.
“What it would trade at post-bid is hard to say because we don’t know what Getco’s financials look like,” Allen said. “You’d have to know more about Getco’s profitability, risk profile, volatility of earnings and balance sheet before you could say whether they’d trade at a premium or discount.”
Knight has transformed over the last decade from mainly handling orders from individuals sent by brokers into a financial services company with institutional clients, electronic trading and businesses in fixed income and currency. It owns the Hotspot FX and BondPoint platforms, provides research and asset management and got into the reverse mortgage business in 2010. Knight had more than 1,545 employees at the end of September, it said in a regulatory filing.
In an Aug. 6 interview, Getco’s Coleman said Knight’s disappearance wouldn’t have yielded a “better world” for Getco. Without Knight’s ability to provide liquidity, “it would be more expensive for everyone to trade,” he said in a phone interview.
“In some ways Knight’s a competitor, in some ways they’re a client, in some ways we’re their client,” Coleman said. “But at the end of the day the liquidity they provide and I think the liquidity we provide probably makes both of us better. This is in our strategic interest to make sure Knight stays viable.”
Along with Getco, founded in 1999, the firms that provided capital to Knight in August included Blackstone Group LP, brokerages Stifel Nicolaus & Co. and Ameritrade and investment banks Stephens Inc. and Jefferies Group Inc. Virtu does not have a stake in the company.
Jefferies profit from its stake in Knight may be pushed to $160 million based on the valuation Getco is proposing and $120 million for Virtu’s $3 a share bid. The firm acquired convertible preferred securities that were swapped for about 81 million common shares of Knight for $1.50 each.