Investor Group Inks Deal for Datek Online –

Bain Capital is betting on online trading.

The Boston-based buyout group early this month led an investor group including Silver Lake Partners, TA Associates and Advent International, in an agreement to purchase a majority stake in Datek Online Holdings Corp. for $700 million. The transaction, which is expected to close after this issue goes to press, is the largest private equity investment in an online financial services firm, according to Credit Suisse First Boston, the deal’s placement agent.

The transaction is structured as a purchase of all of the voting shares held by a group of Datek’s original shareholders, including former Chief Executive Jeffrey Citron, for $500 million. The remaining $200 million will be used as a primary investment in the firm for general corporate purchases, said Ed Nicoll, chief executive with Datek.

As a result of the deal, Island ECN will be spun off as a separate company. Datek has owned an 85% stake in Island. Matt Andersen, Island president and CEO, said the company plans to develop new marketplaces, products and customers after the spin-off.

Stephen Pagliuca, a managing director at Bain Capital, said his firm’s interest in the business was threefold: Datek is a market leader, it exists in a high-growth market and has a great management team, led by Nicoll.

Pagliuca expects Datek’s growth to continue. “Online trading is a low cost, efficient way for people to take control of their financial lives. We believe in the long-term future of self-directed online trading, which we see growing between 15% and 20% per year vs. the traditional low-technology approach.”

Covering Their Assets

Nicoll said one important result of the purchase was to remove a cloud that has hung over Datek for some time. Two investigations of practices of Datek’s predecessor company, Datek Securities, are currently in progress. New ownership “allows us to explore joint ventures, expand internationally in a way we could not have in the past. It also makes it easier for us to attract top talent,” Nicoll said.

Celent Communications analyst Sang Lee thinks Island ECN was particularly attractive to Datek’s new owners. “It has the potential to become a huge player in the institutional market,” he said.

Island ECN’s importance as a component of the transaction was what Datek has in common with this year’s other brokerage deals – Deutsche Bank‘s purchase of National Discount Brokers Group and CSFB’s purchase of DLJdirect as part of the Donaldson Lufkin & Jenrette acquisition.

The brokerage divisions were probably not the only reason for the deals, Lee said.

“I’m not really convinced that Deutsche Bank bought NDB because of the online part. The marketmaker [NDB Capital Markets] is more profitable. And DLJdirect was an afterthought of acquiring DLJ itself,” he said.

As for Datek, $700 million bought 70% of the company, “If you add the other pieces, as a whole, I don’t think that’s an outrageous amount,” Lee added.

Pagliuca added, “The price of the deal reflects market conditions. Like all of our investments, our decision to participate in this deal is based on Datek’s strong management team and industry-leading position in a growing market.”

Available Options

Possibilities for Datek Online include an initial public offering, which Robertson Stephens Senior Analyst Scott Appleby said would “not only be a capital infusion but a branding event and catalyst to Datek’s businesses.”

Nicoll agreed, but declined to give a specific timetable. “We would strongly consider an IPO if circumstances warrant it,” he said. “We don’t have an S-1 drawn up. We’re maybe going to poke our heads up in 2001 and see how it stands,” he said. Island ECN, as a separate company, would assess the appropriateness of an IPO individually, he added.

Chris Musto, vice president of research with Gomez Advisors, said an advantage for Datek in having Bain as an investor was Bain’s willingness to wait, rather than rush into an IPO.

“Bain has experience in taking investments in companies, not with an eye to taking a quick flip and going public. That patience may be rewarded in a situation where anyone hoping for a Datek IPO has had to be patient so far,” Musto said.

Pagliuca left the possibility of acquisitions open. “Datek has more than $14 billion in customer assets and has a tremendous opportunity for growing its customer base. With Datek’s strong management team and infusion of new growth capital, it is well positioned to pursue potential acquisitions in the brokerage and ECN sectors,” he said.

Larry Tabb, director of Tower Group‘s securities and investments practice, said acquisitions were likely for Datek in the technology area. “I think you’ll see technology acquisitions that cater to active traders, newer technologies to harness the Web. I wouldn’t see them making a play for Tradescape or TD Waterhouse.”