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Virtu/ITG Acquisition - Two Great Tastes that Go Great Together

Traders Magazine Online News, October 5, 2018

John D'Antona Jr.

Virtu Financial and ITG – two great firms that could go great together.

Much like Reese’s Peanut Butter Cups that tout the chocolate and peanut butter concoction is “two great tastes that go great together,” the potential acquisition of ITG by Virtu could be the same as the complementary nature of the two makes for good business.

Richard Repetto, Principal at Sandler O'Neill + Partners, L.P. said that this deal smacks of a previous one completed by Virtu – the acquisition of KCG.

“ITG is a somewhat unique property that could fit with Vrtu,” began Repetto in a note.ITG's established institutional sales force can enhance Virtu’s agency brokerage capabilities globally. With Virtu having established principal trading in wholesale & exchange listed market making, institutional brokerage could round out its platform.”

But, given the attractive nature of ITG, which itself has been undergoing its own metamorphosis of sorts, he added that other U.S. and global market makers and agency brokers will likely have an interest in ITG as well.

But limiting his remarks to ITG, Repetto said cost synergies could be meaningful but likely not comparable to KCG. He explained that given ITG's Strategic Operating Plan and focus on efficiencies ($30 million in annualized cost saves achieved to date), he believes potential Virtu/ITG synergies will be material but not at the level of KCG.

“We conservatively assume 20% cost synergies (on ITG's expense base) or ~$100 million in annual expense reductions in our VIRT/ITG merger model,” Repetto said.

However, a potential merger is not without risks, he added.

Our conservatism leads us to assume some revenue dis-synergies. In our merger model, we incorporate 15-20% revenue dis-synergies. We acknowledge this could be highly conservative as Virtu  gets high marks for how it managed customer relationships in the KCG merger,” Repetto said. “Recall that in its acquisition of KCG, Virtu assumed revenue dis-synergies of $42 million or ~7% of KCG's TTM ended March 2017 revenue. To our knowledge, VIRT has experienced virtually $0 revenue dis-synergies following the integration of KCG.”

So, how is the market taking this news? At the initial moment when the news of the potential acquisition broke, ITG shares surged more than 25%, on a down day in the market.

Virtu is working with a financial adviser to pursue ITG, Bloomberg reported, citing unidentified people familiar with the matter. Virtu and ITG have been holding talks about a deal recently, but there’s no assurance a transaction will happen, according to Bloomberg.

ITG’s stock jump, from $22 to $27.60, indicates the market is fairly confident that a buyout will be finalized, as an M&A rumor with less credibility might push a stock up in the order of 5% to 10%.

Markets Media and Traders Magazine staff attending the Security Traders Association conference in Washington, D.C. solicited some reactions to the Bloomberg report.

One STA attendee said that the Virtu-ITG combination seems like a “done deal”. This industry person speculated that a merger could result in 50%-60% headcount reductions at ITG.

Another STA attendee said he wasn’t surprised that ITG would be taken over, as while the franchise is a valuable asset, the company couldn’t quite get its act together over the past couple years.

And at the annual STA Chairman's Dinner, one executive who spoke from the dais referred to the deal jokingly, as "ITG/Virtu" much to the laughter of the crowd. Nevertheless, the referral was taken by many to mean that the acquisition was more than likely to be completed.  

ITG’s stock performance supports that opinion, as the share price fluctuated mostly between $20 and $22 through 2016 and the first nine months of 2017, while financial stocks overall appreciated by about 15% over that time.

Virtu investors apparently have no problem with an ITG buyout, as VIRT shares increased 10% today. Virtu’s market capitalization is about $4.3 billion, compared with $910 million for ITG.


MarketsMedia staff assisted in this report

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