NEW YORK (
) - Trading firm
has offered to buy embattled competitor
Knight Capital Group
for $3.50 a share in cash and stock, after an early August software glitch caused the firm
Although $3.50 a share is far below Knight Capital's beginning of year share price above $10, investors should celebrate the unsolicited offer that may yet turn to a bidding war, amid speculation other firms such as Virtu Financial may be circling Knight's assets.
That's because Knight Capital's quick resolution to its trading losses and its takeover offer at a market cap above $600 million will prove financial firms that raise capital quickly in a time of crisis can find a buyer without asking for government support, or going the way of
Within days of Knight Capital's early August trading blunder, the company raised $400 million in new capital, which kept the firm in business and may yet pave the way for a reasonably priced takeover. The deal, which issued preferred stock that could be converted into 267 million common shares at a strike price of $1.50, also diluted existing shareholders by over 73%.
, Getco and
, in addition to financial heavyweights such as
, were among the investors in Knight's capital raise. Getco holds roughly 15% of Knight's shares as a result of the funding.
In August, some investors were
by speculation the company would hold out on a dilutive financing, in favor of a last ditch buyout attempt by a competitor.
Knight Capital's expediency in resolving its biggest issue - quickly eroding capital - was the top priority and not whether the company's chief executive Thomas Joyce could negotiate good M&A terms.
As speculation of a buyout at share prices not seen since the trading blunder mounts, Joyce's focus on capital over deal negotiations appears vindicated. With capital, trading firms like Knight or banks like Lehman can focus on takeover negotiations. Without capital, financial sector investors have seen the time run's dry quickly.
Earlier this week, Knight Capital said it will postpone a quarterly
analyst and investor meeting
, in a move that may signal some type of deal announcement or negotiations are imminent.
KBW analyst Niamh Alexander writes in a Wednesday note to clients that Knight Capital may be burdened by too much uncertainty to warrant a premium takeover bid, but that the firm also has the ability to survive on its own.
" KCG did the dilutive convertible issue in order to be able to continue to operate independently and we think it absolutely could continue to operate and recover standalone over time," writes Alexander, who gives the firm's shares a $2.60 price target.
While it's debatable whether Knight Capital's chief executive Tom Joyce can be celebrated for the company's survival, his decision to expediently raise capital at any cost may be taken as a cue for other financial institutions up against the Wall Street eight ball.
In the past, Wall Street CEO's have played a dangerous game of trying to get a good rescue price over raising capital, with disastrous consequence.
No doubt, Joyce will likely still face a flurry of shareholder lawsuits for the $440 debacle and there's no guarantee that Knight will be acquired at $3.50 a share or any price that's palatable to longtime investors. Still, for now, the company's current share price over $3 appears to be a vote of confidence by the market.
Knight's dilutive rescue should be taken as a wakeup call to financial sector investors, who now have a painful example of how new equity is the first line of defense for a firm in crisis. Takeover negotiations can always follow.
For more on Wall Street takeovers, see why a buyer came to the rescue of Jefferies after it rescued Knight Capital
-- Written by Antoine Gara in New York