James Rundle: The Tragic Romance of BGC and GFI

It’s a classic scenario: Broker One has worked with Broker Two for some time. They’ve shared some professional rivalry, cooperated a few times, interacted at industry events, and have mutual friends. Broker One harbors a secret crush on Two, but suddenly, it all goes wrong when Exchange A starts eyeing Two’s assets, and the pair decide to tie the knot after a whirlwind romance. Broker One resolves to break up the wedding with a public declaration of love. But Two shoots One down, so One has to win over their mutual friends before the deal can be sealed.

That’s the narrative that BGC Partners would probably like to present about its pursuit of rival broker GFI Group, which agreed to sell itself to the CME Group in July 2014. The deal was fairly unremarkable. A management consortium would buy back the brokerage part of the firm, CME would keep the technology assets, everyone’s happy—everyone, that is, except BGC.

Both are based in New York and operate broadly similar businesses. BGC approached GFI’s board with a $5.25 per-share, all-cash offer to acquire 100 percent of the firm, not including the 13.4 percent it already owned, but after negotiations collapsed, it turned hostile and appealed directly to the shareholders. It quickly became the story of an otherwise dry summer.

Tug-of-War
An increasingly bizarre series of events, followed, chronicled mainly through belligerent press releases, Securities and Exchange Commission (SEC) filings and quarterly earnings calls. A special committee of independent GFI directors rejected the proposal, and BGC didn’t get the shares it needed, so it extended the deadline from November to December. CME shrugged and tossed another few chips into the pile, raising its bid from $4.55 to match BGC’s $5.25. After avoiding sanction by UK authorities for buying up GFI stock without prior approval, BGC extended the deadline again to January and wrote to GFI, saying it would up the ante by 20 cents per share to $5.45.

CME has never hidden the fact that it just wants Trayport and Fenics, two important platforms in the energy and foreign-exchange (FX) trading sectors, and indeed, it has seemed rather blasé about the whole thing. GFI has been cartwheeling from development to development, and BGC is acting like it smells blood in the water.

Going electronic for the sake of it is not the answer to all of life’s problems. Just ask the equity markets

What’s not been in question at any point is whether GFI will be sold. It will, even if events take a dramatic (if unlikely) turn and neither suitor ends up winning its hand. The bloated interdealer broker space is ripe for consolidation, as pointed out by Icap CEO Michael Spencer in recent interviews. But there has been a lot of commentary about whether or not BGC’s offer can ever succeed. After all, an investment vehicle operated by GFI’s current senior management owns around 40 percent of the group’s shares, and it will be sweater weather in Hell before they pledge it to BGC’s offer, which requires 45 percent share approval to succeed. Likewise, certain conditions, such as acquiring control of GFI’s board, seem reasonable at face value, but can also be perceived as complex. Outside of the GFI/BGC tussle, the latter has also acquired UK broker RP Martin for an undisclosed figure, which heavily expands its FX firepower and enhances its geographical reach.

It can be seen as a win–win for BGC, whatever the outcome. The potential combination of GFI with BGC, along with its recent acquisition of RP Martin, would create an electronic-trading juggernaut. If it succeeds, it will go down in history as a daring and bold corporate raid. If not, BGC’s profile has been raised, and it successfully drove the media discourse to date without even commenting to the press outside of statements in public releases. But despite the fact that chairman and CEO Howard Lutnick has said the firm is “very, very serious” about its offer, it’s difficult to envisage a future where GFI doesn’t go off into the sunset with CME.