Having put Instinet up for grabs in an IPO in May 2001, Reuters may now buy back the outstanding portion of the stuggling broker. However, this would mean Reuters made quite a profit buying back the shares at a discount, which could leave it open to lawsuits from Instinet investors. Cutting its holding or merging Instinet with a rival might be a more likely outcome.
Reuters is reportedly considering a buy back of the remaining portion of Instinet.
Instinet last week reported that there was a possibility that the company will be in danger of making operating losses for Q2 2002. Reuters, which currently holds an 83% stake in the electronic securities broker, floated Instinet on the market last May. Now the business information group is considering repurchasing the other 17%.
If Reuters did buy back the Instinet shares, the company would seem to benefit as they were sold at $14.50 but are now valued at approximately $6.50 – Reuters would be purchasing the shares at less than half the price originally sold for. This sounds like a good thing – but it might prompt uproar from the minority shareholders. It could end up facing litigation.
However, a buy out is not the only option worth considering. Instinet is losing market share in the electronic brokerage stakes, as companies such as Island make headway. The recent merger between Archipelago and Redibook has also rocked its boat. Stiff competition coupled with the slump in share trading, has driven the units value down. With the company’s volatile situation in mind, Reuters will also have to consider merging Instinet with one of its rivals.
Reuters will have to be careful with its choices. Although the Instinet stake makes up approximately 9% of Reuters’ value, the company relies on the trader more heavily for operating profits. The anticipated operating loss for Instinet has also brought downwards revision for Reuters 2002 earnings forecasts.
If Reuters decided to buy the spun off shares it would need to get the timing just right – on the one hand it cannot repurchase the shares at too much of a discount, but on the other, it needs to get some benefit if the move is to be worth while. Repurchasing would be a gutsy move for the company, but it may be more likely to play it safe and reduce its holding.