Getco and Knight Capital Expected to Merge in First Half of Next Year

on Dec 20, 2012

On Wednesday 19 December the Financial Times reported that Getco, the algorithm trading firm, has acquired market-maker Knight Capital (NYSE:KCG) in a bid to become one of the largest electronic trading companies on Wall Street.

**The Deal**
The acquisition deal values Knight Capital at some $1.4 billion (£861 million), including debt. It’s a cash-and-stock offer, meaning that shareholders such as Blackstone will have to choose between receiving $3.75 in cash per share or one share of common stock of the newly created holding company. Investors in Getco will receive 75 million warrants which can be used at specific share price thresholds and 233 million of common stock. Jefferies and Getco, who are already investors in Knight Capital, have agreed to limit the cash they request to 50 percent of their Knight shares in order to allow the other shareholders to get up to $720 million (£443 million) in cash. If requests for cash go above $720 million (£443 million), they will be pro-rated.

The offering by Getco represents a 13 percent premium to Knight Franks share price on Tuesday’s closing price of $3.33. The share price of the high-frequency trading firm climbed 5.41 percent to $3.51 on Wednesday when the deal was announced. The acquisition process is expected to be finalised sometime in the second quarter of next year.
**The Road so Far**

According to Reuters the first reports of Knight Capital looking for buyers came out on November 23 leading to a three-week bid battle between Getco and Virtu, a rival high-frequency trading firm. Virtu initially proposed an all-cash deal of$3 a share but later improved its offer to $3.20. Under that deal Knigth Capital would have been taken off the New York Stock Exchange and would have become a private firm with Tom Joyce, Knight’s chief executive, retaining his position.

!m[The Newly Created Company Will Become One of the Biggest Liquidity Providers on the Market](/uploads/story/1072/thumbs/pic1_inline.png)
Instead Daniel Coleman, Getco’s CEO, will now become chief executive of the new company while Mr Joyce will be an executive chairman. “Tom and I are going to review all of the businesses,” Coleman said in an interview with Reuters.

**The Prospects**
Knight Capital is one of the top US market makers responsible for about 10 percent of US stock trading. Getco is one of the biggest high-frequency trading firms and also has substantial market making operations. “We will ultimately end up with a very formidable player in the automated trading market,” opined Sang Lee, an analyst at Aite Group.
Mr Coleman believes the newly created company will become one of the largest if not the largest liquidity provider in the world. “The combination of Knight and Getco will create a powerful, dynamic firm with an unmatched ability to deliver results for clients. Market participants will benefit from industry-leading services, and our larger capital base will provide strong support for existing operations, as well as an attractive currency for growth.” Getco’s CEO said in a statement.
The FT however quotes Kenneth Worthington, an analyst at JPMorgan, who cautioned that Knight’s software glitch in the summer highlighted the fragility of its market-making operations and its susceptibility to errors. This makes the combined venture between Getco and Knight challenging for investors to value. Mr Coleman assured that Getco has carried out significant due-diligence during the bidding process and is confident in Knight’s risk controls.


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