Ameritrade has finally won the long bidding war for its rival. Amid a background of depressed share trading and poor earnings forecasts, Ameritrade seems to have paid a hefty price. The company will have to draw heavily on Datek’s strengths – specifically, its strong technology and its high revenue per customer – to make the move worthwhile.
Ameritrade has agreed to acquire fellow eBroker Datek Online in a $1.3 billion deal.
Weeks of bidding for Datek Online drew to a close on Sunday after Ameritrade offered $1.3 billion, ahead of rivals E*Trade and TD Waterhouse. The merger will create one of the largest brokerage firms for self-directed investors. Ameritrade believes that following the merger, the company will be able to offer customers a more flexible service tailored for the individual client as well as providing value for money.
In recent months, following the ongoing slump in share trading, many eBrokerage firms, including both Ameritrade and Datek, have been facing difficulties. Archipelago and Redibook merged in November of last year to try and boost scale; at the institutional end of the market, Instinet appears to be struggling and is on the look out for a possible rescue deal. With market competition consolidating, merging with a rival could also be appealing for Ameritrade.
However, in light of the poor market conditions, Ameritrade seem to be paying heavily for the acquisition. Ameritrade warned only last week that Q1 earnings will fall below average expectations, making it a brave time to launch a $1.3 billion bid. But on the other hand, Ameritrade needs some action for a chance to return to success in a highly competitive market.
To make the purchase worthwhile, Ameritrade will have to focus on learning and applying Datek’s strengths. One such strength is Datek’s fast transactional technology – the company is confident enough in its technology to offer a 60 second execution guarantee on US stock orders.
Also, Datek’s clients are notoriously profitable in comparison with other brokerage firms – and better than others at active trading. If Ameritrade can persuade its own customers to follow the example of their peers at Datek, it could find itself in a strong position. The danger, of course, is that things might go the other way.