Who wants a trading company that just a few months ago needed an emergency bailout to survive a $400 million-plus trading loss? We are, of course, talking about Knight Capital (NYSE: KCG) and apparently at least two companies want it, and they're willing to pay up for it.
Last night I wrote about a Wall Street Journal report that Virtu Financial had an edge in the bidding process as it was supposedly preparing an all-cash bid for Knight, which contrasted with the expected bid from Getco (more on that in a moment) that would be an offer of cash and stock.
The latest is that we still don't know exactly what Virtu plans to do, but we do know that Getco has slung a bid that values Knight at roughly $3.50 per share and would indeed be a combination of cash and stock.
Getco is a private company that's backed by private equity firm General Atlantic, so offering up stock in the deal isn't quite as straightforward as in a typical public-to-public merger. Instead, Getco would execute a reverse merger with Knight that would keep the combined company as a publicly traded entity. Current Knight shareholders would receive shares in that combined company in addition to the cash portion of the offer.
Though details of the Virtu bid are vague -- obviously, since they haven't made it yet -- I estimated that if the company valued Knight at around $1 billion, investors would see roughly $2.90 per share. That's a good deal lower than Getco's offer, but it has the advantage of having a very clear value to it and offering investors closure on their investment. Of course, with Getco's offer now out there, Virtu would likely try to bring its offer up closer to Getco's.
A Getco advantage?
Investors who believe in Knight and its platform may actually prefer the Getco offer to being handed cash. In an industry that's rapidly changing, and where size and might matter, combining with Getco could make Knight an even more formidable force. Of course, if you ask me, a key piece of Knight's value comes from the leadership of CEO Tom Joyce. So in the Getco scenario, I'd be interested to see whether Joyce sticks around or not.
Unless Virtu is willing to get aggressive with its bidding, investors may want to get familiar with the Getco offer, because -- the allure of cold, hard cash aside -- it seems to me that Getco should have a leg up in this process. When Jefferies (JEF), Blackstone (BX), TD Ameritrade (AMTD), and the rest of the save-Knight consortium stepped up with an emergency bailout, Getco was part of that group, so it already owns a chunk of the company. In addition, its private equity backer nabbed a seat on Knight's board. And if that's not enough, the WSJ reported that signs point to Jefferies as the backer providing the cash for Getco's bid.
Knight's board is still obligated to choose the deal that best serves investors, but when shades of gray creep in, you've got to figure that all of that works in Getco's favor. Not to mention that working the investors' best interest mostly means working in the interests of the bailout group, since they now own most of the company.
Buy, sell, or sit tight?
I'm stubborn when it comes to buyout speculation, and my consistent take is: Just don't do it. It would appear that Knight is rolling toward a buyout that would offer a price above today's. However, nothing's set in stone, here, and if the process falls apart, then we can expect the stock to fall considerably. If I were buying today, I'd only buy to own the business, not to speculate on the buyout.
On the other hand, for those that already own the stock, you'll obviously want to hang onto the stock if you're rooting on the Getco offer and would like to own the combined company. On the other hand, if you've been holding the stock and were unclear of why you were holding it (it happens to all of us), this isn't a terrible opportunity to sell. At the time of this writing, the stock has jumped to $3.40, which is a slight premium above the most recent tangible book value (assuming the conversion of the preferred shares).
And if you're stuck in the middle and can't figure out what to do? This is a good opportunity to sit down with the numbers and figure out what you think Knight is worth -- or revisit the numbers you've already run. Armed with that, you'll be in a much better position to figure out what to do during this bidding process.
