Instinet, Island Merge to Create Nasdaq Rival

Instinet Group Inc., a subsidiary of Reuters PLC, said it has agreed to shell out $508 million in stock to acquire Island ECN. The two companies are considered Nasdaq’s biggest rivals.

Under the deal Instinet is to issue about 77 million shares to Island’s owners, which include major private equity investors TA Associates, Bain Capital and Silver Lake Partners. Island shareholders will end up owning about 25% of Instinet’s expanded share capital.

Reuters, said Instinet, which had about $700 million in cash in December, would also issue a special dividend of $1 per share to all Instinet shareholders before the deal is settled. Reuters, whose stake in Instinet is to be diluted to 62% from 83% now because of the deal, said it would receive about $207 million of the planned dividend. It had not yet decided how to use the cash.

The combination creates the largest Nasdaq-listed alternative electronic trading network, second only to Nasdaq itself, with the new combined rival controlling 20% of Nasdaq volumes compared to about 30% by the exchange itself.

Island Chairman Ed Nicoll is to become chief executive of the merged company, with Instinet’s acting chief executive, Mark Nienstedt, remaining as president and chief financial officer.

Though some elements of the final agreement still are being worked out, the merger would seem to be an important step forward for Island, a relative upstart with a tenth of Instinet’s staff. It is also important for Reuters, which has been struggling to find a strategy for the company.

Reuters said the deal would deliver significant synergies by teaming Instinet’s strong institutional order flow and the “speed, reliability and efficiency” of Island’s trading system. It would position Instinet “for improved profitability in the months and years ahead,” Instinet’s Nienstedt said.

SuperMontage

For their part, Nasdaq officials are hoping to snag more trading business with the scheduled launch next month of its new trading system, SuperMontage (see Nasdaq Unveils SuperMontage Pricing Plan ).

SuperMontage is aimed squarely at the traders who in recent years have left Nasdaq for electronic networks such as Island and Instinet, which are computerized platforms that allow people to buy and sell stock without going directly to a stock market such as Nasdaq or the New York Stock Exchange.

The merger fulfills long-held industry predictions of consolidation among alternative share dealers or electronic communications networks , which charge a fee to match up buy and sell stock orders electronically.
 
Founded in 1969 as a system for trading Big Board-listed stocks, Instinet – whose name was a shorthand version of the term “institutional network” – had spent nearly three decades dominating the business of trading away from the official stock markets.

But in the midst of those initiatives, say people close to the company, Instinet neglected its core business of providing cheap, efficient stock-trading technology – an oversight that eventually allowed Island to eclipse the one-time leader.