Ameritrade Bulks Up With Datek

Against a backdrop of two straight down years for the stock market, the question is whether the model of targeting active traders can succeed in the long term. For the investors behind Ameritrade Holding Corp.’s deal to acquire Datek Online Holdings Corp., the answer is obvious.

The deal, which makes the online brokerage firm the biggest pure online broker in the world, also makes TA Associates, Bain Capital, Silver Lakes Partners and Advent International very happy campers.

Although none of the private equity players have made any money on the deal yet, they saw the value of their holdings almost double as a result of the merger. TA Associates, Bain Capital, Silver Lake Partners and Advent will own 50% of the stock in the newly formed online brokerage. The value of the two online brokerage houses together is approximately $1.3 billion.

“I am in a position to make a lot of money, but I am not high-fiving anyone just yet,” said Kevin Landry, managing director and chief executive officer of TA Associates. “I haven’t made a profit or cashed out, but I am happy for this opportunity.”

Banking on Commonalities

The private equity firms are hoping that their investments will become even more valuable as the new company trims the fat and brings in more revenue. As one online brokerage company, the new entity can save on call center costs, marketing initiatives and personnel expenses. As a matter of fact, Ameritrade closed down National Discount Brokers offices, and a source close to the situation said that many of Datek’s 1000 employees would be given pink slips as a result of the merger. Financial savings should be approximately $100 million after-tax.

Steve Pagliuca, a partner at Bain Capital, who expects consolidation to become a huge driver in the online brokerage market, said that Ameritrade would look to acquire smaller brokers if it makes sense. “But for now, we’re going to take the greatest parts of each company and put them together and really create a new Ameritrade,” Pagliuca said.

The two companies, which have been in negotiation talks since January, finally struck a deal in the first week of April. After the deal closes, which should be in the next 90 days, Bain Capital, which invested roughly $250 million for its share of Datek, is said to be receiving $275 million worth of stock, giving the Boston-based firm roughly 10% ownership in the new company.

TA Associates is expected to own about 9% of the combined companies. That holding represents an 18% increase over the $196 million that TA had invested in Datek. TA Associates first invested $60 million into Datek, then pumped in an additional $135 million.

Silver Lake Partners will own approximately 8% of Ameritrade, while Advent will own about 3%.

Together, Datek and Ameritrade are expected to execute 164,000 trades per day, control $3 billion in client assets and bring in total revenue of more than $800 million.

Pagliuca and Landry will take board seats with the new company.

In The Beginning

Sources close to the situation said that after Datek’s founders ran into legal trouble involving some reporting issues with the Securities and Exchange Commission in 1998, the Jersey City, N.J.-based online brokerage had no choice but to sell out. “Money always helps, but the company really brought investors in because it needed to become disassociated with the original founders, which are now long gone,” said the source, who added that Datek is more profitable than Ameritrade.

Enter private equity firms. In 1999, TA Associates led an investment to provide $195 million of growth capital to Datek, which, despite its legal trouble, was still experiencing growth, as it had become the fourth largest online brokerage in terms of transaction value. Then in December 2000, TA Associates, Bain Capital and Silver Lake Partners made a $700 million investment in Datek that gave them a majority stake.

“When we invested, online brokerage had a lot of room to grow. The cost is so much lower to trade online. It used to cost $50 for a trade, and now you can do it online for $10,” Pagliuca said. “Less than 25% of people are doing it, so there is still plenty of room to grow.”

But, shortly after the private equity consortium made its investment in Datek, the online brokerage market started its downward spiral. However, Datek still managed to stay profitable, which was part of its appeal to Ameritrade as it is clearly looking to position itself as a leader in the online brokerage space. In September, Ameritrade, based in Omaha, Neb., acquired National Discount Brokers for $167 million.

It wasn’t only Ameritrade that was on the lookout for a partner. Landry said that Datek was also hoping to team up with a similar online brokerage. “Everyone knows there is consolidation happening in this industry. We wanted to be proactive and pick a partner to dance with now instead of later finding out that all the attractive people have been taken. So we started searching,” Landry said.

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