DJ: Instinet Group Is Holding Talks to Buy Island ECN ---- By Kate Kelly and
(Wall St. Journal Full Text 05/16 02:05:02)
Robert Frank
INSTINET GROUP INC. IS IN TALKS to purchase Island ECN, a deal valued at
potentially more than $500 million that would combine the two biggest
electronic stock-trading networks and could pose a growing challenge to the
long-established exchanges, especially the Nasdaq Stock Market.
Upstart Island recently edged out once-dominant Instinet as the market
leader in trading volume. But Instinet, a publicly traded company that is
majority-owned by British media and technology firm Reuters PLC, would be
the buyer because it is a much bigger company overall, according to people
familiar with the discussions.
Though some of the details are yet to be worked out and negotiations may not
result in a deal, talks are progressing and an agreement could be announced
by the end of the month, these people say. A spokesman for Instinet said the
company doesn't comment on rumors, and a spokesman for Island had no
comment.
Market watchers long have anticipated consolidation would take place in the
fragmented market of electronic-communications networks, known as ECNs,
which became popular in the late 1990s along with the online-trading
explosion. ECNs anonymously match buy and sell orders, often offering
cheaper and faster electronic executions and bypassing the stock exchanges.
Together, Island and Instinet handle about 22% of all share volume in Nasdaq
Stock Market listed companies. By joining forces, they could offer more
liquidity -- including better pricing and ease of trading -- and attract a
larger base of both institutional investors and small investors, with fast
technology and shelf space on nearly every major trading desk.
The new entity could pose a major threat to Nasdaq, which is attempting to
win back market share from ECNs and trading firms with a new, souped-up
trading system called SuperMontage that is to be unveiled this summer.
Though no ECN has yet made significant inroads into New York Stock
Exchange-listed stock trading, over the long term a combined Instinet and
Island could be poised to snatch a piece of the trading action off the Big
Board's floor as well.
Although Island has been rapidly gaining market share from Instinet because
of its superior technology and low user fees, the company remains much
smaller than Instinet. Last year, Island had revenue of more than $150
million and pretax income of more than $40 million, according to a person
familiar with the company's finances. Instinet's revenue last year totaled
$1.5 billion with net income of $144.8 million.
To securities analysts, a merger of the two firms would be no surprise.
"There are a certain number of combinations that could make sense, and one
could be [Instinet and] Island," said Barry Chubrik, who covers the
computer-services space for Credit Suisse Group's Credit Suisse First
Boston. "We've certainly seen a number of transactions happening in
tangential spaces, and it only makes sense in an industry where your
pricing, over the long-term, comes down, and it's a scaled business."
For Instinet, the case for consolidation is obvious. The granddaddy of the
electronic-trading industry, Instinet was founded in 1969 as a vehicle for
trading NYSE and American Stock Exchange stocks. But over time, Nasdaq
trading came to account for the vast majority of Instinet's trading-based
revenue.
Until the mid-1990s, Instinet had little competition. Its trading terminals
were on nearly every institutional trading desk, and the company was
generating plenty of cash flow for Reuters, which had purchased Instinet in
1987. But as regulators opened stock trading to more competition, and the
bull market gained momentum, new ECNs began popping up to take advantage of
the skyrocketing trading volumes in Nasdaq-listed technology stocks.
One of those was Island, which was founded in 1997 as a subsidiary of the
online trading firm Datek Online Holdings Corp. Island, which was powered by
a tiny staff and a roomful of personal computers, nevertheless distinguished
itself with fast technology and relatively cheap user costs. The company
gained a strong foothold within the rapid-fire day-trading community, and
from there began attracting more mainstream investors as well. In recent
years, Datek has reduced its interest in Island to a less-than-10% stake --
though the two companies still share a chairman, Ed Nicoll -- and a series
of venture capitalists and private-equity investors. Bain Capital, TA
Associates, and Silver Lake Partners have taken large stakes in Island.
Last fall, Island overtook Instinet in its market share for trading
Nasdaq-listed stocks, the first time another ECN had ever done so. In
addition, Island surpassed the American Stock Exchange in its trading of the
Amex-listed Nasdaq-100 Index Tracking Stock, known popularly by its trading
symbol QQQ, an exchange-traded fund that tracks the Nasdaq's 100 biggest
nonfinancial stocks.
At the same time, Instinet has been struggling. An initial public offering
last spring soured, with the stock dropping precipitously from the IPO price
of $14.50. (In Nasdaq trading yesterday, Instinet shares were down 12 cents
at $7.) New services, like fixed-income trading and the distribution of
research, hadn't yet gained traction, and Instinet Chief Executive Doug
Atkin was under pressure from his board. In addition, it was losing business
because Island offered lower fees. In early April, Mr. Atkin left the
company, and Instinet undertook a series of layoffs.
05/16/2002 02:00 |
