Merger of GETCO and Knight

12 Months Ended

Dec. 31, 2014

Business Combinations [Abstract]

Merger of GETCO and Knight

Merger of GETCO and Knight

Background

Pursuant to the Merger Agreement, each outstanding share of Knight Class A common stock, par value $0.01 per share (“Knight Common Stock”), was converted into the right to elect to receive either $3.75 per share in cash or one third of a share of KCG Class A common stock, par value $0.01 per share (“KCG Class A Common Stock”). As a result of the elections and proration procedures provided in the Merger Agreement, former Knight stockholders received cash payments aggregating $720.0 million and 41.9 million shares of KCG Class A Common Stock.

Upon completion of the Mergers, GETCO unitholders received, in aggregate, 75.9 million shares of KCG Class A Common Stock and 24.3 million warrants to acquire shares of KCG Class A Common Stock. The warrants comprise 8.1 million Class A warrants, having a $12.00 exercise price and exercisable for a four-year term; 8.1 million Class B warrants, having a $13.50 exercise price and exercisable for a five-year term; and 8.1 million Class C warrants, having a $15.00 exercise price and exercisable for a six-year term (collectively the “KCG Warrants”).

Accounting treatment of the Mergers

The Mergers are accounted for as a purchase of Knight by GETCO under accounting principles generally accepted in the United States of America ("GAAP") based on, among other factors, the controlling ownership position of the former GETCO unitholders as of the closing of the Mergers. Under the purchase method of accounting, the assets and liabilities of Knight as of July 1, 2013 were recorded at their respective fair values and added to the carrying value of GETCO's existing assets and liabilities. The reported financial condition and results of operations of KCG for the periods following the Mergers reflect Knight's and GETCO's balances and reflect the impact of purchase accounting adjustments, including revised amortization and depreciation expense for acquired assets. As GETCO is the accounting acquirer, the financial results for KCG for the first six months of 2013 and the full year 2012 comprise solely the results of GETCO.

Prior to the Mergers, GETCO treated its investment in Knight as an available-for-sale security, which it recorded at fair value, with any gains or losses recorded in other comprehensive income as a component of equity.

All GETCO earnings per share and unit share outstanding amounts in these financial statements have been calculated as if the conversion of GETCO units to KCG Class A Common Stock took place on January 1, 2013, at the exchange ratio as defined in the Merger Agreement. See Footnote 20 "Earnings Per Share" for further information.

Purchase price and goodwill

The Knight acquisition was accounted for using the acquisition method of accounting. The aggregate purchase price of $1.37 billion was determined as the sum of the fair value of KCG shares issued to former Knight stockholders at closing; the fair value of Knight employee stock based awards attributable to periods prior to closing; and the fair value of the Knight Common Stock owned by GETCO and its subsidiaries immediately prior to the Mergers (and subsequently canceled in conjunction with the Mergers).

The purchase price has been allocated to the assets acquired and liabilities assumed using their estimated fair values at July 1, 2013, the closing date of the Mergers. As of June 30, 2014, the Company, based on updated information, recorded purchase accounting adjustments that increased goodwill by $1.1 million, deferred tax assets by $3.1 million, and accrued expenses by $3.5 million, and decreased other assets by $0.7 million on the opening balance sheet at July 1, 2013 as well as the December 31, 2013 Consolidated Statement of Financial Condition. As of June 30, 2014, the Company had completed its analysis to finalize the allocation of the purchase price to the Knight acquired assets and liabilities.

Tax treatment of the Mergers

The Company believes that the Mergers will be treated as a transaction described in Section 351 of the Internal Revenue Code, and both Knight and GETCO have received tax opinions from external legal counsel to that effect. Knight’s tax basis in its assets and liabilities therefore generally carries over to the Company following the Mergers. Upon completion of the Mergers, the Company became a corporation subject to U.S. corporate income taxes and, following the Mergers, the Company recorded deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. The Company measures deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse.

The Company recorded net deferred tax assets of $65.5 million with respect to recording Knight’s assets and liabilities under the purchase method of accounting as described above as well as recording the value of tax net operating loss ("NOL”) carryforwards and other tax attributes acquired as a result of the Mergers, as described in Footnote 17 “Income Taxes”.

The following table reflects the allocation of the purchase price to the assets acquired and liabilities assumed at the acquisition date (in thousands):

Identifiable Net Assets
Cash and cash equivalents	$	509,133
Cash and cash equivalents segregated under federal and other regulations	203,045
Financial instruments owned	1,937,929
Securities borrowed	1,158,981
Receivable from brokers, dealers and clearing organizations	1,369,474
Fixed assets and leasehold improvements	80,280
Investments	106,353
Intangible assets	155,425
Assets within discontinued operations	5,607,063
Deferred tax asset, net	65,465
Other assets	140,933
Total Assets	$	11,334,081
Financial instruments sold, not yet purchased	$	1,512,983
Collateralized financings	1,166,211
Payable to brokers, dealers and clearing organizations	635,914
Payable to customers	527,918
Accrued compensation expense	107,409
Accrued expenses and other liabilities	130,010
Liabilities within discontinued operations	5,518,168
Debt	375,000
Total Liabilities	$	9,973,613
Total identified assets acquired, net of assumed liabilities	1,360,468
Goodwill	12,666
Total Purchase Price	$	1,373,134

Goodwill has been primarily assigned to the Market Making segment of the Company. None of the goodwill is expected to be deductible for tax purposes; however, as described in Tax treatment of the Mergers above, Knight’s tax basis in its assets, including certain goodwill, has carried over to the Company as a result of the Mergers.

Amounts allocated to intangible assets and goodwill, and the amortization period for intangible assets with finite useful lives, were as follows (dollars in thousands):

			Amortization
	Amount		Years
Technology	$	110,504	5 years
Customer relationships	35,000		9 - 11 years
Trade names	4,000		10 years
Trading rights (1)	5,921		7 years
Intangible assets	155,425
Goodwill	12,666
Total	$	168,091

⁽¹⁾ Trading rights include both assets with a finite useful life and assets with an indefinite useful life. The 7 years amortization period only applies to assets with a finite useful life.