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Strategies & Market Trends : The Good-The Bad and The Ugly -- Ignore unavailable to you. Want to Upgrade?

To: rowrowrow who wrote (3762)	10/29/2000 6:47:01 PM
From: Tim Luke	Respond to of 8686

Last of the Red-Hot Market Makers Despite a profit dip, Knight could fetch billions It's the kind of company, engaged in one of Wall Street's oldest lines of business, that some pundits predicted a year ago would be annihilated by technology. It's also a firm that earned just $20.6 million in the last quarter. Yet analysts believe market maker Knight Trading Group Inc. (NITE) could fetch over $4 billion from a potential suitor. Sound nutty? Not if you're the object of Wall Street's latest desire. Knight is the last large independent market maker left since investment banks began snapping up its rivals at increasingly rich prices. In June, Merrill Lynch forked over $915 million for Herzog Heine Geduld, which handles roughly half as many trades of Nasdaq stocks as Knight. Four months later, Goldman Sachs (GS) agreed to plunk down $7.4 billion for Spear, Leeds & Kellogg--a price estimated to be about 15 times the company's expected profits this year--partly because of its market-making division. Then, on Oct. 12, Deutsche Bank (DTBKY) offered a rich 16 times adjusted earnings for National Discount Brokers Group (NDB). NOT FOR SALE? The bottom line for Knight? Although it suffered from a weak third quarter with earnings down nearly 30% due to a difficult market environment over the summer and outlays on aggressive international expansion, the consensus of Wall Street analysts is that it will earn about $260 million in 2000. If they're right, a deal at 18 times those earnings would give Knight more than a $4 billion price tag. Knight's chief executive, Kenneth D. Pasternak, insists ''the company is not for sale.'' But with would-be matchmakers talking up possible deals with the likes of Citigroup (C) (talk on which Citi declines comment), Pasternak adds: ''That does not preclude consideration of a buyout. At a price, everything in the world is for sale.'' Wall Street's willingness to pay up shows that market makers still play a vital role. Investment banks have found that electronic communication networks (ECNs) are effective only at matching buy and sell orders in highly active stocks such as Dell Computer Corp. (DELL) Humans still need to play a significant role in trading less-liquid shares: Traditional market makers like Knight keep their own inventories of shares electronically to ensure that there is always a buyer or seller for less actively traded shares. ''The endgame is a marriage between the New Economy ECNs and the Old Economy market-making services,'' says Henry McVey, securities industry analyst at Morgan Stanley Dean Witter. Pasternak is in a strong position to negotiate. ''Knight can continue on its own,'' says Merrill Lynch analyst Sean Chin. Pasternak is investing $40 million in another, larger trading room in Jersey City, N.J., while pressing ahead with plans to expand overseas operations in London and Tokyo. He expects revenues to rise 43%, to $1.4 billion, this year and believes Knight can still keep increasing earnings by 25% a year. That growth wouldn't be as dramatic as the company's 60% profit jump in 1999. But more retail investors are flocking to the stock market--even during a volatile year with many Nasdaq declines.