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The Global Electronic Trading Company or Getco LLC is all set to acquire the troubled automated trading firm Knight Capital Group, Inc. (KCG - Snapshot Report) for $1.4 billion. The cash and stock deal is expected to close in the first half of 2013.

Under the terms of the deal, Knight Capital and Getco LLC will combine to form a new publicly-traded company. The shareholders of Knight Capital will be allowed to opt for either $3.75 per share in cash or one share of stock in the new holding company. The cash consideration will be subject to pro-rata allotment if the holders choose to receive more than $720 million in cash.

Also, Jefferies Group, Inc. and its associates (the largest shareholders in Knight Capital) have decided to restrict their cash portion to 50% of their shareholding to ensure that the remaining shareholders can receive their cash considerations in full.

Moreover, Getco LLC will receive 233 million shares of the new holding company and nearly 57 million Knight Capital shares it currently owns will be retired. Getco LLC’s members will receive around 75 million warrants in the new holding company. On the basis of the tangible net worth of Getco LLC and Knight Capital, as of September 30, 2012, pro forma tangible book value of the new company is likely to be about $3.75 per share.

Knight Capital – considered as one of the most advanced trading platforms – lost nearly $461.1 million owing to a software malfunction in August this year. The malfunction sent umpteen number of accidental orders to the market over a 45-minute period, leaving Knight Capital in a precarious financial position.

Knight Capital had to seek rescue financing to the tune of $400 million. A group of investors – including Getco LLC, Jefferies Group, TD Ameritrade Holding Corporation (AMTD - Analyst Report), The Blackstone Group LP (BX - Analyst Report), Stifel Financial Corp. (SF - Snapshot Report), and Stephens Inc. – provided the finance, in exchange of over 70% stake in the company.

We believe that the merger between Knight Capital and Getco LLC will result in a more powerful trading platform, given the huge resources of both the companies. This will help the market participants to avail better facilities and make trading much simpler.

Currently, Knight Capital retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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