I give you a tiny puzzle. Getco offered to buy Knight Capital a month ago for $3.50 a share, in the form of a cash-stock-election structure complicated by the fact that Getco is not (yet) a public company and so the value of your stock election is a bit of a mystery. Today the Knight board accepted Getco’s revised offer, which is similar but provides $3.75 per share, so I guess the mystery has been cleared up to its satisfaction; there will eventually be a merger proxy/prospectus so soon it will be cleared up to everyone’s satisfaction or possibly dissatisfaction.
The puzzle: if Getco is increasing the cash paid for Knight shares by 25 cents, or 7.1%, then it should also increase the value of the share election by 7.1%, to keep things in balance. And in fact it seems to have done so: while the original offer said that the tangible book value per share of newco would be $3.50, the revised one says:
Under the agreement, existing Knight shareholders (other than GETCO) will have the right to elect to receive $3.75 per share in cash or one share of common stock of the new holding company. The cash consideration will be subject to pro-ration if the holders elect to receive more than $720 million in cash in the aggregate. … GETCO members will receive 233 million shares of the new holding company and the 57 million shares of Knight currently owned by GETCO will be retired. GETCO members will receive warrants in the new holding company as follows: 25 million warrants with a $4.00 exercise price and a four-year term; 25 million warrants at a $4.50 exercise price and a five-year term; and 25 million warrants at a $5.00 exercise price and a six-year term. Based on the tangible net worth of GETCO and Knight as of September 30, 2012, pro forma tangible book value of the combined company would be approximately $3.75 per share.
Hmm, so, how did the tangible book value of the combined company get to be 7% bigger than it was a month ago? Well, Getco is taking fewer shares (but more warrants) in newco; 233mm instead of the 242mm in its original offer. That’s about 4% fewer shares, which shouldn’t really make the per-share value 7% bigger, should it?
Anyway my silly math is here and it suggests that Getco’s implied tangible book value – implied by the deal I mean – was $735mm a month ago and is $839mm today. Where’d the extra $104mm come from? Well $55mm of it seems to have come – the mechanics are a little vague – from General Atlantic, which is investing another $55mm in Getco as part of the deal. The rest of it … I am puzzled. Any ideas?