Will Hotspot FX need to find a new home?

Acquisition rumors swirl around Knight Capital after weekend WSJ article.

The parent company of Forex ECN Hotspot FX, Knight Capital (NYSE: KCG), has seen its shares spike by about 20% the past two trading days, since a Wall Street Journal weekend article stated that Knight was weighing the sale of its main equity market-market business to one or two of its rivals in that business. Despite its early-August troubles which nearly toppled the firm, Knight remains the biggest handler of stock orders for U.S. retail brokerage firms.

The talk and speculation on Wall Street has quickly shifted from a sale of the market-making unit, to a sale of the entire company — leading to the share price rise. It is difficult to see how (or why) Knight would continue as an independent company, if it sold its biggest and most profitable business. And if it is sold in its entirety — likely mainly for the market-making unit — it is also likely that the new buyer will not necessarily want to also own a Forex ECN.

Knight bought Hotspot FX in 2006 for $77 million. But based on other benchmarks, such as the $625 million which Thomson Reuters paid in the summer to buy FXall, it is likely that Hotspot FX would fetch somewhere in the $150 million range. That would go a long way toward a buyer of the entire Knight Capital financing the purchase, with the current market value of Knight sitting at about $540 million.

For more on Forex industry M&A and valuations, including a list of M&A transactions dating back to 2006 and a valuation comps table, see the LeapRate-Dow Jones Forex Industry Report.


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