Knight Capital stock surges on buyout offer

Despite a recent surge, shares of Knight Capital are down 71% year-to-date.

Let the bidding games for Knight Capital (KCG) begin.

The struggling trading firm received its first public buyout offer Wednesday from rival and partial owner Getco.

In an SEC filing, Chicago-based Getco said it was offering $3.50 a share, representing an 18% premium over Knight's closing price on Tuesday. The news sent shares of Knight surging Wednesday, with the stock briefly touching the $3.50 mark.

Under the proposed terms, Getco Chief Executive Dan Coleman would become chairman and CEO of the merged company. Knight CEO Tom Joyce, whose contract is set to expire on Dec. 31, would become the non-executive chairman. Coleman said the new firm would be a "magnet to customers, talented traders and technologists, which is especially important in an environment of lower trading volumes and higher regulatory engagement."

Knight Capital acts as a middleman in the markets, completing investors' orders to buy and sell stocks. In August, the company lost $440 million after a trading software snafu sent numerous erroneous orders in NYSE-listed securities into the market.

Getco is a high speed electronics trading firm that was part of a consortium that rescued Knight after the August debacle.

The group, which also included TD Ameritrade (AMTD), Blackstone Group (BX), Stifel Nicolaus, Jefferies Group (JEF) and Stephens Inc., paid $400 million to acquire a majority stake in Knight.

Related: Troubled broker Knight Capital may be for sale

But the trading blunder left Knight in a precarious financial position.

The firm has lost out on trading orders and seen an exodus of several high-level executives. Whether or not the company inks a final deal to sell itself, Knight is expected to be forced to radically restructure the company, according to analysts. Any next step for the company will likely result in the loss of a majority of Knight's 1,600 employees.

Knight Capital confirmed that it received the letter from Getco and declined to comment further. The firm is expected to see other bidders emerge in the next few days, including Virtu Financial, another high-speed trading firm. Virtu did not return calls for comment.

In August, during its frantic hunt for rescue financing, trading firm Citadel made two offers for Knight. This time around, Citadel is unlikely to bid, according to a source close to the situation.

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Troubled broker Knight Capital may be for sale

Knight Capital's shares are down more than 75% following its $440 million trading glitch.

NEW YORK (CNNMoney) -- It hasn't been business as usual for Knight Capital since a massive software glitch in August nearly felled the 15-year old trading firm. Knight Capital is now weighing offers for individual business lines and hasn't ruled out a sale of the entire firm.

According to an email sent by Knight Capital's CEO Thomas Joyce to employees on Saturday that was obtained by CNNMoney, Knight said the company will only consider a sale if the terms are right.

"There is no need for Knight to pursue a partnership, transaction or any other undertaking. We would only move forward with such an initiative if it makes strategic sense for our shareholders and our business," Joyce wrote in the email.

Shares of Knight Capital (KCG) jumped nearly 20% Monday, as investors weighed reports of a potential deal.

Whether or not Knight can finalize a sale, the firm is widely expected to restructure its business in the coming months and cut a large amount of its 1600 employees, according to several analysts.

"Whether someone comes in and buys Knight or if there's a scenario where nothing happens, there has to be a sizeable restructuring of the company to improve the profitability of the business," said Chris Allen, an analyst at Evercore.

Knight could fetch roughly $1.1 billion in a sale, Allen estimates. Nearly all of the value would come from its electronic trading business Hotspot and its market making business.

Knight spokesperson Kara Fitzsimmons declined to comment on a potential sale or layoffs.

Related: Trading plummets at Knight Capital

Knight's institutional stock trading division, which accounts for roughly 41% of Knight's revenues, has been unprofitable in recent years. Potential buyers are expected to dismantle that unit shortly after buying it, analysts said.

And even with Monday's pop, shares of Knight are down 75% in 2012. Following the trading glitch, Knight was forced to launch a frantic bid for capital. A consortium of companies, including TD Ameritrade (AMTD), Blackstone Group (BX), Getco, Stifel Nicolaus, Jefferies Group (JEF) and Stephens, put in $400 million to rescue Knight. In doing so, they diluted the trading firm's existing shareholders.

Knight has been beset by other issues since then. Its trading volume has dropped. Most recently, in the aftermath of Hurricane Sandy, Knight was forced to reroute trades after a power outage knocked out its computer systems.

Knight's newest shareholders are said to have different opinions on how long they want to hold onto their stake in the firm. Allen said that Blackstone and Getco, partially owned by private equity shop General Atlantic, would be more likely to hold onto their investment for the long-term. But Jefferies and TD Ameritrade are more likely to be pushing for a quick sale.

Getco and Virtu are said to have approached Knight about buying the company, according to news reports. Getco declined to comment. Virtu did not return calls for comment.

Blackstone and Jefferies could consider their own offers Knight, according to analysts. Neither firm returned calls for comment.

Knight's competitor Citadel, which made two bids for the company in August, is not expected to put in an offer for the company now, according to a source familiar with the process. Citadel declined to comment.

Related: Knight's costly trading glitch: $440 million

Although Knight is better capitalized now than it was before the trading glitches, investors are still wary.

Michael Wong, an analyst with Morningstar, said that "Knight's excess capital is weighing on its returns." But he pointed out that the company needs that extra cushion to prove to its partners that it is on solid financial footing. Knight could be more valuable as a private company, several analysts said. The company could benefit from not having to disclose as much about its finances.

Joyce's future at the firm is also at stake. His employment agreement only extends through December 31st. Analysts said that if the firm is sold, the new owners would decide whether or not he should remain at the helm in 2013.

First Published: November 26, 2012: 3:49 PM ET

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