(FROM THE WALL STREET JOURNAL 1/30/15)
By Liz Hoffman, Katy Burne and Telis Demos
A takeover fight between hard-charging rivals over a broker to
Wall Street's biggest banks is coming to a head, a showdown that
has split the firm's board amid dueling claims about management
conflicts and the hostile bidder's motivations.
The prize: GFI Group Inc., a firm overseen by one Wall Street
veteran, Mickey Gooch, and coveted by another, Howard Lutnick, the
chief executive of competing brokerage BGC Partners Inc.
Their battle reflects both bitter competition within the
interdealer broker market -- where middlemen connect banks trading
derivatives such as interest-rate and credit-default swaps -- and
broad changes reshaping formerly lucrative businesses on Wall
Street. Revenues at smaller brokerages including GFI have declined
since the financial crisis as regulations aimed at reducing risk on
Wall Street have led banks to shrink their trading activity.
Mr. Gooch, who is 55 years old, is trying to buy part of GFI,
which he co-founded.
He has backed a deal in which CME Group Inc., the Chicago
exchange operator, would acquire GFI for $5.85 a share in a mix of
cash and stock, and then sell the brokerage division to Mr. Gooch
and other insiders. CME, which runs the Chicago Mercantile Exchange
and the New York Mercantile Exchange, would keep GFI's software
businesses.
A shareholder vote on that offer is scheduled for Friday
morning.
Mr. Lutnick, 53, is best known as chief executive of Cantor
Fitzgerald LP, another Wall Street brokerage. In 2004, it spun out
BGC Partners, which Mr. Lutnick also heads and which has made a
hostile bid for GFI. BGC has amassed 13.5% of GFI's shares and is
offering $6.10 a share in cash for the rest.
BGC's bid values GFI at $778 million, versus $746 million for
the CME deal. GFI's market capitalization is about $724
million.
A failed vote for the CME deal could pave the way for BGC to
complete its own takeover, or set the stage for further
fighting.
In an industry mostly dominated by five firms, competition for
clients and top brokers has bred an animosity among its major
players that at times has spilled over into public view. BGC
recently agreed to pay $100 million to settle a lawsuit brought by
Tullett Prebon PLC, a British rival, over the poaching of
brokers.
British-born Mr. Gooch, who learned the interdealer brokerage
business in London, launched GFI in 1987 with two partners and just
$300,000. In 2013, he stepped down as CEO while remaining executive
chairman.
In a January email to employees that was reviewed by The Wall
Street Journal, Mr. Gooch said he mistrusted BGC's intentions to
honor the financial terms of its offer, based on "prior
observations . . . of Howard Lutnick['s] dealings." In another
email in November, he said he had "heard from more than a few of
you that you would not want to work for a company controlled by
BGC."
GFI's management argues that BGC's bid, though higher in value,
contains many conditions that could let BGC eventually reduce its
offer price.
They point to the fact that BGC has declined to sign an
agreement that would prevent BGC from poaching GFI traders ahead of
any deal, and have sought the right to lower or drop their bid if
they learn that top GFI traders don't plan to stay.
BGC also has made its bid conditional on GFI's board agreeing to
give BGC a majority of its seats, which GFI's board -- consisting
of Mr. Gooch, CEO Colin Heffron and three independent directors --
hasn't agreed to do.
GFI shares closed at $5.68 a share Thursday, suggesting some
investors doubt the odds of collecting $6.10 from BGC.
"There is some skepticism in the market," said Peter Drippe of
Visium Asset Management LP, a $6.5 billion multistrategy investment
firm that owns GFI shares.
Mr. Lutnick is a force on Wall Street best known for bringing
Cantor Fitzgerald back from the brink after the Sept. 11 terrorist
attacks killed two-thirds of its employees. People close to him
said he is a polished and savvy businessman who often gets his way
on deals.
BGC has argued publicly that Mr. Gooch and his team are trying
to buy the traditional brokerage business for less than it is
worth. And it has promised to honor the contracts of GFI's
traders.
The bidding war already has split GFI's own board, an unusual
occurrence, even in contested deals.
On Jan. 15, after BGC's latest raised bid, two independent
directors urged the full board to drop its support for the CME deal
but were overruled by the other three directors, filings show.
GFI was dealt a setback when proxy advisers Institutional
Shareholder Services Inc. and Glass, Lewis & Co. recommended
investors reject the CME-management deal, citing alleged conflicts
of interest by Messrs. Gooch and Heffron as well as the price gap
with the BGC bid.
Those recommendations, along with BGC's ownership stake and a
requirement at GFI that any merger be approved by a two-thirds
majority, lengthen odds for its passage Friday. Mr. Gooch and his
partners on the deal have said they are acting in the best
interests of all shareholders.
Some investors said they feel torn, wary of both sides'
intentions.
"There's no doubt in my mind that both parties have ulterior
motives, and that makes it hard to pick a side," said Sean O'Neill,
a portfolio manager at Doheny Asset Management, a Los Angeles-based
investment firm that owns about 2% of GFI.
Access Investor Kit for BGC Partners, Inc.
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Access Investor Kit for CME Group, Inc.
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http://www.companyspotlight.com/partner?cp_code=P479&isin=US12572Q1058
Access Investor Kit for GFI Group, Inc.
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http://www.companyspotlight.com/partner?cp_code=P479&isin=US3616522096
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