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Article from NYTimes.

The Knight Capital Group confirmed on Monday that it had struck a $400 million rescue deal with a group of investors, staving off collapse after a recent trading mishap, even as the New York Stock Exchange temporarily revoked the firm’s market-making responsibilities.

The rescue package, which was arranged by the Jefferies Group, includes investments from TD Ameritrade and the Blackstone Group. Getco and Stifel, Nicolaus & Company were also involved.

“We are grateful for the support of these leading Wall Street firms that came together to invest in Knight,” Tom Joyce, the firm’s chairman and chief executive, said in a statement. “The array of participants in this capital infusion underscores Knight’s critical role in the capital markets.”

In a regulatory filing, Knight Capital said the investors agreed to purchase $400 million of the brokerage firm’s preferred stock. Under the terms of the deal, Knight will also expand its board by adding three new members.

The deal could provide the investors with more than 260 million shares of the firm, affording the investors the right to buy the shares at $1.50 a piece, according to the statement. Last week, before the trading blunder, the firm’s shares closed over $10.

The rescue deal will hugely dilute existing shareholders of the company. In mid-morning trading, shares of Knight Capital were down 24 percent.

The lifeline was assembled in the wake of Knight Capital’s disclosure of a $440 million trading loss. The loss stemmed from a technology error that occurred on Wednesday when the firm unveiled new trading software, a glitch that generated erroneous orders to buy shares of major stocks. The orders affected the shares of 148 companies, including Ford Motor, RadioShack and American Airlines, sending the markets into upheaval.

Knight Capital said it reached the deal on Sunday, and it expected to close the transaction on Monday. It was a rapid a recovery for a firm that just days ago was facing collapse.

Still, the firm faces significant challenges. The New York Stock Exchange said on Monday it “temporarily” reassigned the firm’s market-making responsibilities for more than 600 securities to Getco, the high-speed trading firm that also invested in Knight. Market makers buy and sell securities on behalf of clients.

The move, the exchange said in a statement on Monday, was a stop-gap measure needed until the investor deal was final. Once the recapitalization plan is complete, Knight will resume its duties.

“We believe this interim transition is in the best interests of investors, our listed issuers, market stability and efficiency, as well as Knight, as the firm finalizes its equity financing transaction,” Larry Leibowitz, chief operating officer of NYSE Euronext, said in the statement.

Knight Capital also faces heavy regulatory scrutiny. The Securities and Exchange Commission is examining potential legal violations as it pieces together the firm’s missteps.

The problems for Knight Capital began at the start of trading on Wednesday. The firm tweaked its computer coding to push itself onto a new trading platform that the New York Stock Exchange opened that day. Under this program, trades from retail investors shift to a special platform where firms like Knight compete to offer them the best price.

But when Knight’s new system went live, the firm “experienced a human error and/or a technology malfunction related to its installation of trading software,” the firm explained in the filing on Monday.

Chaos ensued. The error caused Knight to place unauthorized offers to buy and sell shares of big American companies, driving up the volume of trading and causing a stir among traders and exchanges.

Knight had to sell the stocks that it accidentally bought, prompting a $440 million loss. The loss drained Knight’s capital cushion and caused “liquidity pressures,” the firm said in the filing.

“In view of the impact to the company’s capital base and the resultant loss of customer and counterparty confidence, there is substantial doubt about the company’s ability to continue as a going concern,” the filing said.

Knight and its chief executive, Thomas M. Joyce, began contacting potential suitors for parts of the business, and the firm consulted restructuring lawyers on a potential Chapter 11 filing, according to the people with direct knowledge of the matter.

But events soon turned in the firm’s favor.

The firm secured emergency short-term financing that allowed it to operate on Friday, and it used Goldman Sachs to buy at a discount the shares Knight had erroneously accumulated.

Some of the firm’s biggest customers, including TD Ameritrade and Scottrade, said that they had resumed doing business with Knight by Friday afternoon.

The firm capped its efforts to stay afloat on Sunday with the rescue deal. Knight expects to finalize the agreement on Monday morning and detail the financing terms in a regulatory filing.

“Knight’s financial position and capital base have been restored to a level that more than offsets the loss incurred last week,” Mr. Joyce said in a statement. “We thank our clients, employees and partners for their steadfastness during a brief yet difficult period and we are getting back to business as usual.”

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Article from NYTimes.

“With a huge initial public offering on the runway, Facebook has shown that it pays to have friends. New investors will now have to decide what they are willing to pay to be friends.

The giant social network said in a filing on Wednesday that it was seeking to raise up to $5 billion through its I.P.O. Many close to the company say that Facebook is aiming for a debut that would value it between $75 billion and $100 billion.

At the top end of the range, Facebook would be far bigger than many established American companies, including Amazon, Caterpillar, Kraft Foods, Goldman Sachs and Ford Motor. Only 26 companies in the Standard & Poor’s index of 500 stocks have a market value north of $100 billion.

Already, Facebook is a formidable moneymaker. The company, which mainly sells advertising and virtual goods, recorded revenue of $3.71 billion in 2011, an 88 percent increase from the previous year. According to its filing, Facebook posted a profit of $1 billion last year.

“Facebook will have more traffic than anyone else, and they’ll have more data than anyone else,” said Kevin Landis, the portfolio manager of Firsthand Technology Value Fund, which owns shares in the privately held company. “So, unless they are impervious to learning how to monetize that data, they should be the most valuable property on the Internet, eventually.”

A lofty valuation for Facebook would evoke the grandiose ambitions of the previous Internet boom in the late 1990s. Back then, dozens of unproven companies went public at sky-high valuations but later imploded.

Investors are eyeing the current generation of Internet companies with a healthy dose of skepticism. Zynga, the online gaming company, and Groupon, the daily deals site, have both struggled to stay above their I.P.O. prices since going public late last year.

“We’ve seen thousands of investors get burned before,” said Andrew Stoltmann, a securities lawyer in Chicago. “It’s a high risk game.”

The potential payoff is also huge.

Consider Google. After its first day of trading in 2004, the search engine giant had at a market value of $27.6 billion. Since then, the stock has jumped by about 580 percent, making Google worth nearly $190 billion today.

Facebook is still a small fraction of the size of rival Google. But many analysts believe Facebook’s fortunes will rapidly multiply as advertisers direct increasingly more capital to the Web’s social hive.

Mark Zuckerberg, founder and chief executive of Facebook.

Mark Zuckerberg, a founder of Facebook and its chief executive, even sounded like his Google counterparts in the beginning. In the filing, Mr. Zuckerberg trumpeted the company’s mission to “give everyone a voice and to help transform society for the future” — not unlike Google’s plan: “don’t be evil.”

Investors are often willing to pay up for faster growth. At a market value of $100 billion, Facebook would trade at 100 times last year’s earnings. That would make the stock significantly more expensive than Google, which is currently selling at 19.6 times profits.

Newly public companies with strong growth prospects often garner high multiples. At the end of 2004, the year of its I.P.O., Google was trading at 132 times its earnings.

But investors have less expensive options for fast-growing technology companies. Apple made nearly $1 billion a week in its latest quarter, roughly the same amount Facebook earned in all of 2011. At a recent price of $456, Apple is trading for roughly 16.5 times last year’s profits.

Investors now have to try to ignore the I.P.O. hype and soberly sift through the first batch of Facebook’s financial statements to gauge the company’s potential.

Online advertising is a prime indicator. At Facebook, display ads and the like accounted for $3.15 billion of revenue in 2011, roughly 85 percent of the total. With 845 million monthly active users, advertisers now feel that Facebook has to be part of any campaign they do.

“When you have an audience that large, it’s hard not to make a lot of money from it,” said Andrew Frank, an analyst at Gartner, an industry research firm.

For all the promise of Facebook, the company is still trying to figure out how to properly extract and leverage data, while keeping its system intact and not interfering with users’ experiences. On a per-user basis, Facebook makes a small sum, roughly $1 in profit.

The relationship with Zynga will be especially important. The online game company represented 12 percent of Facebook revenue last year, according to the filing. However, estimated daily active users of Zynga games on Facebook fell in the fourth quarter, from the third quarter, the brokerage firm Sterne Agee said in a recent research note — a trend that could weigh on the social networking company.

Facebook also faces intense competition for advertising dollars, something it acknowledges in the “risk factors” section of its I.P.O. filing. While advertisers will likely choose to be on both Facebook and Google, they will inevitably compare results they get from both. Some analysts think Google may have the edge in such a competition.

Google users tend to be looking for something specific. This makes it easier for advertisers to direct their ads at potential customers, analysts say. “Visually, Facebook ads are eye-catching, but in terms of accuracy of targeting, they are not even close to Google’s ads,” said Nate Elliott, an analyst at Forrester Research. “A lot of the companies we talk to are finding it very hard to succeed on Facebook.”

However, the high level of interaction on Facebook could prove valuable to advertisers. “At Facebook, you are looking at people’s interests, and what they are sharing,” said Gerry Graf, chief creative officer at Barton F. Graf 9000, an advertising agency in New York that has used Facebook for clients. If Facebook becomes a place where people recommend, share and buy a large share of their music and movies, such a business could generate large amounts of advertising revenue, as well as any user fees.

“Facebook has become the biggest distribution platform on the Web,” said Daniel Ek, the founder of Spotify, a service that accepts only Facebook users.”

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