Instinet Looks To Beat SuperMontage
Ari Weinberg, 06.10.02, 12:46 PM ET
NEW YORK - When the going gets tough, the tough get together.
With increased competition looming in the stock-trading game, Instinet (nasdaq: INET - news - people ) is acquiring competitor The Island ECN (electronic communications network) for $508 million in stock. The move comes just under two months before Nasdaq rolls out its beefed up order and execution system known as SuperMontage, which has been engineered to provide the best liquidity for market makers big and small. While Instinet serves 40 markets around the world, Nasdaq trades are the lion's share of its business. Island has recently made a name for itself as a marketplace for increasingly popular exchange traded funds.
Instinet and privately held Island are both electronic communications networks, which garnered favor in the 1990s with institutional and professional traders looking for fast, cheap and anonymous trade execution--a platform in which Nasdaq itself had fallen behind. Capitalizing a little late on stock market euphoria, Reuters Group (nasdaq: RTRSY - news - people ) sold 14% of Instinet in a May 2001 initial public offering, after buying the firm for just $102 million in 1987. [Full disclosure: Reuters is an investor in Forbes.com.] Worth nearly $3.5 billion at the IPO, Instinet has watched its market share and market value shrink, as lower trading volumes and decimalization made stock trading a less lucrative business. Before today's open, Instinet was worth $1.75 billion.
In April, Instinet Chief Executive Doug Atkin resigned, supposedly over disputes with the company's Reuters-controlled board about cost-cutting and competition. With first-quarter revenue down 36% to $267 million for a net loss of $34.7 million--compared to a net profit of $50.1 million for the first quarter 2001--Atkin was said to be gunning for a merger like this. Just a few weeks before, two smaller ECNs--Archipelago and REDIBook--closed their merger, which had been announced in late November.
Ed Nicoll, the chairman of Island, will take over as chief executive for the combined company. For the past two months, Instinet Chief Financial Officer Mark Nienstedt had been serving as acting CEO. Nicoll is also the chairman and chief executive of online trading firm Datek, which was sold to Ameritrade (nasdaq: AMTD - news - people ) for $1.29 billion on April 7, but he will leave that post when the sale closes. Both Datek and Island are now owned by a group of private equity firms, including TA Associates, Bain Capital and Silver Lake Partners.
The details of today's deal sound shaky at best. The market seems to be applauding the deal, and Instinet's stock is up 3%. (Perhaps due to investors looking to reap the $1.00 per share cash distribution when the deal closes, a 14% yield.) On the conference call, analysts questioned how the companies would combine their technologies and fee structures--with Instinet currently focused on large institutions and Island on active traders. From the responses, it sounds as if the companies haven't thought the deal out that far--a true sign that this buyout may have been done in haste to boost investor interest in Instinet. (Reuters itself will pick up $206 million in cash on the distribution and dilutes its ownership stake to 62%.)
Analysts also questioned how the company would treat Island's current application for exchange status, which would allow it certain regulatory advantages, as well as Island's current verbal commitment to participate in Nasdaq's SuperMontage. Instinet has not yet committed itself to the super system, due mostly to the fact that Instinet sees itself more as a Nasdaq competitor and not just a market participant. On the call, Instinet again raised issues with SuperMontage's pricing schema.
Last August, Nasdaq launched the SuperSoes (small order execution system) that has moved traders away from its slower, dated SelectNet, but hasn't done much to increase Nasdaq's share of its market. Combined, SelectNet and SuperSoes crossed 31.8% of Nasdaq volume in April, up from 28.5% in July 2001 before the SuperSoes launch. According to Nasdaq, Island and Instinet moved 15.3% of share volume across Nasdaq in April--a figure that does not include the 9.3% of Nasdaq share volume traded on the Cincinnati Stock Exchange by Island.
Over the past year, the Nasdaq has been slowing moving towards going public itself. Though it hasn't official filed an IPO registration, the company has filed all other documents with the U.S. Securities and Exchange Commission required for a public company. The Nasdaq plans to use an IPO to increase its global scope, which includes ventures in Japan and Europe, attempting to head off ECNs before their international market share swells.
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