WIRED ON FRIDAY: Once the darlings of the internet age, online brokerages are struggling to redefine themselves. The stock market's steep decline has played havoc with their fortunes, which have seen a slump in trading volume over the past two years, writes Carol Power from New York
As a result, online brokerages have scrambled to find acquisition partners in an effort to increase the demand for online trading. This consolidation battle prompted Ameritrade Holding Corp, the US's third-largest discount brokerage, to buy a rival last week.
Ameritrade agreed to acquire Datek Online Holdings for $1.29 billion (€1.5 billion) in stock. At that price, Ameritrade paid $1,540 for each one of Datek's 837,000 accounts, about twice what it paid for National Discount Brokers, the Deutsche Bank AG unit it bought last September.
Datek was only valued at $700 million, but a fierce bidding war broke out between Ameritrade, E*Trade Group, Wells Fargo, Bank of America and Toronto Dominion Bank to win control of the company, which is based along the waterfront in Jersey City, New Jersey, overlooking downtown Manhattan.
Nebraska-based Ameritrade is not the only company snapping up the competition.
In February, Bank of Montreal completed its acquisition of CSFBdirect, the New Jersey-based online brokerage arm of Credit Suisse First Boston, for which it paid $520 million.
CSFBdirect will be integrated with Harris InvestorLine, Bank of Montreal's existing direct investing business in the United States, to form Harrisdirect.
Just last week also, E*Trade announced it would pay $100 million in stock for a speciality service that would nearly double its trading volume and surpass Ameritrade's plans to become the busiest online broker.
By buying New York-based Tradescape, E*Trade expects its volume to balloon from an average of 114,000 daily trades to about 210,000 when the deal closes this summer. If Tradescape hits its earnings targets, E*Trade will pay an additional $180 million in stock over 18 months.
Whereas Ameritrade is sticking to the online route, some of its competition is branching out to other areas.
E*Trade has been slowly building a banking business that offers mortgages.
The Tradescape acquisition would supplement its existing physical network, which includes five financial centres in major cities in the United States, 30 financial zones in Target superstores and the second-largest ATM network in the country, with more than 11,000 ATMs.
With several hundred Schwab centres, Charles Schwab is as much a broker as a financial adviser, and TD Waterhouse, a subsidiary of TD Bank Financial Group of Toronto, is also increasingly selling banking services.
When the Ameritrade-Datek merger is completed, which is expected to happen within three months, the combined entity will have 2.7 million accounts and conduct 164,068 trades a day. Executives at Ameritrade-Datek said it would conduct more daily online equity trades than Charles Schwab, the current leader, which handles about 152,000 online trades a day.
The combined Ameritrade-Datek expects to save $100 million and have total annual revenues of $800 million, three-quarters more than the $457 million Ameritrade reported in its latest fiscal year.
However, Charles Schwab of San Francisco would still remain the industry leader with 4.3 million accounts and $830.1 billion in assets under management, compared with the $43 billion of Ameritrade and Datek combined.
Established in 1998, Datek is privately owned and is controlled by a consortium led by Bain Capital, which bought it for $700 million 18 months ago. The investors decided to put the company up for sale after Datek paid $6.3 million to settle federal charges, one of the largest fines ever paid by a brokerage firm.
The Securities and Exchange Commission accused the company's former day trading unit, Datek Securities, of making hundreds of millions of dollars in profits by illegal trading practices and fraudulent book-keeping. Datek Online, the online brokerage firm, was not implicated.
Founded 27 years ago, Ameritrade employs 1,650 people and charges clients $8 a trade, most of which are executed online. Despite the downturn in the stock market, Joseph Moglia, chief executive of Ameritrade, anticipates the online trading business will grow. He said about 20 million people trade online with that number expected to grow to 50 million within the next few years.
