Instinet to Acquire Island: For Synergy or Volume

NEW YORK (HedgeWorld.com)--Instinet Group Inc. agreed to acquire The Island ECN Inc., in an all-stock transaction, with an estimated value of US$508 million.

The two New York-based electronic trading firms held a joint press conference Monday morning and explained their belief that the deal would create important synergies.

"On the one hand, we have the speed, reliability, and scalability of Island's technology, which has consistently delivered superior performance to professional traders under the most demanding circumstances," said Ed Nicoll, chairman of Island ECN. "On the other hand, we have the deep Instinet institutional order flow, fueled by its premium products and services. In combination, the new company will not only continue to deliver innovative products and services, but will set the standard for meeting the needs of a diverse group of traders and institutional investors worldwide."

Some traders and managers are skeptical of claims of synergy, saying that the change is unlikely to matter greatly to them.

"I think it might help Instinet. The amount of volume that we're doing through Instinet has shrunk violently in the last few years, because of the competition," said Bruce M. Eliot, the managing director of Helix Investments LLC, Los Angeles. "But it won't matter much to us. It's purely a volume issue. Volume begets volume."

Instinet expects to pay a $1 per share cash dividend to Instinet stockholders of record as of a date prior to the closing, plus 25% of Instinet common stock on a fully diluted basis. This involves 86 million shares, 77 million to existing Island stockholders, 9 million to be reserved for converted Island options and warrants. Andre Villeneuve will remain chairman of the board of Instinet after the acquisiton. Ed Nicoll will become the chief executive of the combined entity.

Some History

On Jan.17, 1997, Island was included in the first group of broker-dealers to receive the new "ECN" designation.

In June 1999 it filed with the Securities and Exchange Commission to become the nation's first for-profit exchange.

That September it extended its own operation hours to 8 AM to 8 PM, which was one of the longest continuing trading sessions then available.

In October 2001 Island, which is privately owned, surpassed the American Stock Exchange as the leading marketplace for QQQ, the Nasdaq 100 tracking instrument. It earned US$40 million in pretax profit last year on sales of US$166 million.

Instinet, which is majority owned by the Reuters Group plc, London, needs the boost this purchase may provide. It went public in May 2001 at $14.50 a share. Monday its shares closed in Nasdaq trading at $7.10.

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