Will Instinet land on the block?

Ed Nicoll has plenty of experience when it comes to selling companies. He was a co-founder of Waterhouse Investor Services, one of the first online brokerage firms, which sold out to Toronto-Dominion Bank for $525 million seven years ago. More recently, he cleaned up troubled Datek Online before peddling its brokerage operations to Ameritrade for $1.3 billion and its Island ECN subsidiary to Instinet Group for $364 million in September 2002. Nicoll, 49, then became Instinet's CEO. Now, say people inside the firm, history may be about to repeat itself: Instinet might be the next company Nicoll helps to sell off.

"I don't think there's any question that the plan from the beginning was to sell," says one person close to the company. "It's a matter of when, not if."

Thomas Glocer, CEO of Reuters, which acquired Instinet for $110 million in 1987 and owns a 63 percent stake, won't comment on whether the company might be on the block. Nicoll dispels the notion that Instinet's brokerage business, which employs human traders and computers to execute complex stock trades, might be sold. But he concedes that some change is probably inevitable in the low-margin ECN business, a unit that electronically matches smaller buy and sell orders.

"I would do consolidation, either buy or sell, under the right conditions," he allows.

Nicoll has certainly exercised a strong command, furiously slashing costs since taking over the reins of the 34-year-old company. Despite a 5 percent decline in revenues for the quarter ended September 30, Instinet turned a profit for the first time since 2001. Last year Nicoll split the ECN and the agency brokerage into two separate units. The move made sense strategically -- each business has different needs and profit margins -- and also could facilitate selling one or both of the units separately, observers say. That would be much easier than moving them together.

Among the potential buyers -- or partners -- for the ECN are Archipelago, another electronic trading system, which became an exchange two years ago and plans to go public this year, and Nasdaq, which has lost about half of its market share to Instinet and Archipelago since the late 1990s. Nasdaq has become closer to Instinet in recent months. Chris Concannon, the firm's former head of clearing services, now heads business development for Nasdaq. Shortly after Concannon's move, Instinet agreed to route orders to Nasdaq's SuperMontage trading system -- a surprising about-face -- and Nasdaq announced that it would license Instinet's order-routing technology. Among the potential acquirers of the agency brokerage is rival Investment Technology Group. Archipelago and Nasdaq declined comment. ITG didn't return calls.

As price competition among ECNs has eroded margins, Reuters has watched Instinet's once-buoyant profits wither from $160 million in 1998 to a $35 million loss through the first nine months of 2003. Sources close to Instinet, which Reuters partially spun off in a 2001 IPO, say the British media giant may as a result be inclined to monetize its remaining stake, currently worth about $1.1 billion.

Additionally, the private equity firms that acquired 13 percent of Instinet when it bought Island -- TA Associates, Silver Lake Partners and Bain Capital -- may have a similar desire to cash out. The firms sold 14.4 million of their 43.4 million shares after the stock hit a 15-month high in early November, according to Securities and Exchange Commission filings. Sources say that the firms hope to sell the remainder of their shares as part of an acquisition of Instinet by a strategic buyer, which could deliver a premium over the shares' approximately $150 million market value.