Ameritrade Holding Corp. agreed Monday to buy rival Datek Online Holdings Corp. for $1.3 billion in stock in a bid to become the biggest Internet broker as measured by average daily trades.
The deal comes as online trading continues to wane amid the stock market's two-year slump. But Ameritrade said the combined company stands to benefit from cost savings and an eventual recovery in trading volume. Industrywide, online trading has plunged more than 50% from its peak in the first quarter of 2000.
The deal ends an intense bidding war for Datek, whose value was estimated at $700 million by analysts this year when its private owners put it up for auction. The combined company, with an average of 164,000 trades a day, is expected to vault to a virtual tie with industry leader Charles Schwab Corp. It would be fourth in number of accounts at 2.7 million and in client assets at $43 billion.
By valuing the average Datek account at $1,540, a hefty premium to the industry average, Ameritrade outbid No. 2 online broker E-Trade Group Inc. and several major banks, analysts say.
The deal, expected to close in three months, would give Omaha-based Ameritrade a customer base twice as active as its own. In the fourth quarter, for example, the average Datek customer made six stock trades, versus three for the typical Ameritrade client.
Analysts said the deal would help both companies survive by increasing operating efficiency and easing competitive pressure. But they said the combined company's ultimate success may hinge on whether the online trading boom that accompanied the bull market of the late 1990s ever returns.
Robert Sterling, an analyst at Jupiter Research, noted that the combined brokerage will have an average account size of less than $16,000--about half the industry average--so it will depend on commission volume to stay in the black. Both Ameritrade and Datek offer low-cost Web trading for $10 or less.
Brokers such as E-Trade that have diversified their business models by opening branch offices and offering services such as mortgages may have a better long-term strategy, Sterling said.
But Joe Moglia, chief executive of Ameritrade, said his company would have the operating leverage to thrive when stock trading gains steam again.
"In a diversified model you have more liability on the balance sheet, greater fixed costs and all kinds of regulatory issues," Moglia said. "We're more of a pure play, which gives us greater operating leverage on the upside. We know what we are and we know what works for us."
Executives from the private consortium that owns Datek agreed.
"If we had sold out to a bank we would not be able to fully participate in the upside to come," said Kevin Landry, managing director of Boston-based private equity investor TA Associates, part of the consortium that also includes Bain Capital Inc., Advent International and Silver Lake Partners. The firms bought Datek in December 2000 for an estimated $700 million after its controversial CEO quit and the firm settled charges with the SEC over its trading practices.
Richard Repetto, analyst at Putnam Lovell Securities Inc., called the new company "essentially a 'double-down bet' on online retail trading." Though the near-term outlook for Web trading remains soft, he said the strategy could prove to be a success.
"The three leaders are differentiating themselves," Repetto said. "Schwab is going after the affluent investor, E-Trade is offering a diversified suite of financial services and now Ameritrade is catering to the highly active trader."
Though total online trading accounts in the U.S. are expected to grow from 20 million today to more than 50 million by the end of 2005, Sterling said, most of the new customers are likely to be so-called light traders, who make fewer than 20 trades a year. Many will be existing brokerage customers simply signing up for online access.
"It's not going to be the self-directed trading cowboys preferred by online discount brokers," he said, because that crowd already has opened Web accounts.
Ameritrade rose 12 cents to $6.42 on Nasdaq. The stock has rallied 62% in the last year on hopes for an improved business climate.
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A Snapshot of Online Trading
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