Why did KCG lose $96 million in Q2 and see its shares stay flat?

KCG’s Q2 figures also make apparent what drove Getco to buy KCG.

The newly-merged Getco and Knight Capital (parent of Forex ECN Hotspot FX) — now called KCG — announced results for its first quarter as a merged company on Wednesday, although results were presented separately for Knight Capital and Getco, presumably for the last time. The results included a net loss of $73 million for Getco, and a net loss from continuing operations of more than $23 million for Knight Capital — losses totaling more than $96 million for the quarter.

KCG shares, however, barely budged in Wednesday trading, ending the day down just 0.8% to $8.54 per share. It should be noted, however, that KCG shares have already traded down about 20% since the Knight-Getco merger became final at the end of June.

So why the lack of a market reaction?

The short answer is that the combined losses of Getco and Knight Capital included a combined $137 million (pre-tax) in merger-related writeoffs for things such as professional fees, compensation, writedowns, restructuring charges, financing commitment fees and goodwill. Like with many mergers, the parties try to ‘write off” as many assets and expenses as possible in the immediate aftermath of a merger, taking accounting losses up front, making it easier for the new company to show better results in the future on a smaller asset and expense base. And the Knight-Getco merger is no different.

An interesting note from the Q2 results — looking at the ‘big picture’, Knight’s revenues were up nicely, increasing 11% from Q1 to total $316 million in Q2. For those of you following LeapRate that shouldn’t be a surprise, as we’ve reported that both Knight and its Hotspot FX unit were doing record volumes in Q2. However acquirer company Getco was shrinking, with its Q2 revenues of $127 million down about 10% from last year. Getco’s motivation in buying Knight Capital becomes clearer when looking at where the two equity market making firms were headed.

For the complete KCG Q2 results press release click here.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.


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