CyBerCorp Takeover By Schwab Caps Obscure Firm's Rapid Rise
By AARON ELSTEIN
THE WALL STREET JOURNAL INTERACTIVE EDITION
Two years ago, CyBerCorp Inc. was a tiny brokerage firm in the obscure business of executing orders for a small group of hard-core stock investors known as day traders.
But today, the firm has mushroomed from obscurity into one of the hottest online brokers, gaining popularity as the fast-paced stock executions that drive its business become an important attraction for ordinary investors making trades on their own over the Internet, without help from a broker.
CyberCorp's bread-and-butter are freewheeling investors looking to profit from quick changes in a stock's price, and the company gives them the same access to the market that professionals enjoy. It allows them to route trades directly to the exchanges and private trading systems, improving executions.
The closely-held Austin, Texas, company operated in what was long considered the murky backwaters of the investing business -- day trading. But a few months ago, it jumped prominently onto rankings dominated by established mainstream rivals.
Since then it's grown in popularity: CyBerCorp is now one of the top firms in terms of customer trades. In the first half of last year, it wasn't even on the radar screen For the fourth quarter its average of 14,213 trades per day made it the No. 9 in daily stock trades, according to U.S. Bancorp Piper Jaffray. It climbed onto the list in the prior quarter, when its average daily trades surged 67%.
The company shares the top-ten billing in the fourth quarter with such established mainstream firms as Charles Schwab Corp., E*Trade Group Inc., TD Waterhouse Group Inc., Fidelity Investments and Datek Online Holdings Corp. -- the top five. CyBerCorp's evolution into a force among such firms was underscored last week by a $488 buyout offer from Schwab.
CyBerCorp is the brainchild of Philip Berber. A native of Dublin, Ireland, Mr. Berber got his start in the software business developing what he calls "predictive software" for the defense industry. In the late 1980s he started focusing on financial markets, devising software that tried to predict the price movements of stocks, bonds and commodities.
In the mid-1990s Mr. Berber moved to Block Trading, a Houston, Texas brokerage that was trying to speed up the process of filling stock orders. The firm proved to be the breeding ground for several day-trading entrepreneurs. Mr. Berber and Omar Amanat, the founder of Tradescape.com, both met at Block before the firm closed in 1998.
Mr. Berber left Block to form CyBerCorp in 1995, starting the company using an old personal computer in his son's bedroom. "It was my fourth start-up," he says. "I like being there at the time of creation."
Originally, his company licensed its software to brokerages where customers traded using those firms' computers. But in 1998, as the Internet started to grow in popularity and the number of online brokerages exploded, Mr. Berber stopped licensing his technology and started offering it exclusively for people who opened trading accounts with his firm.
That was the turning point. CyBerCorp quickly became the one of the fastest growing firms in the business. Its accounts increased 40% in the third quarter of 1999, nearly four times the industry average, according to U.S. Bancorp Piper Jaffray, and the number of trades transacted on its site rose 67% in the same quarter, a time when every other firm lost market share.
Although CyBerCorp's 3,000 accounts at year end were tiny compared to the 3.3 million at Schwab and 1.9 million at E*Trade, the firm didn't spend heavily on advertising to attract its audience. It started a message-board on the stock-chat site Silicon Investor (www.siliconinvestor.com) to answer questions from customers and to promote its new trading products, but otherwise kept a low profile compared to its competitors.
As the firm grew, it also attracted wealthy customers who traded far more often than customers at other online brokerage firms. It averaged $80,000 in assets per account, trailing only Dreyfus Corp. and Schwab, and each account averaged 492 trades per quarter, according to Piper Jaffray. Datek's customers, the second-most active, traded an average of 13 times per quarter. Mr. Berber said revenue grew 400% in 1999, to $24.5 million, and the firm's net profit was $4 million. He declined to disclose the prior year's figures.
After Mr. Berber decided last July to seek additional financing for his company, he says several Wall Street firms came offering to buy it outright, including Merrill Lynch & Co., Lehman Brothers Inc., and Reuters Group Inc.'s Instinet unit. He says two firms made bids before he accepted Schwab's offer. A spokesman for Lehman Brothers said the investment bank's venture capital group considered investing in a minority stake in CyBerCorp, but no formal bid was ever made. Merrill Lynch and Instinet declined to comment.
The Schwab deal, while an encouraging development for CyBerCorp, also marks a turning point in the evolution of day trading, which has long been shunned by mainstream brokerage firms. But with day traders now accounting for 11% of all trades on the Nasdaq Stock Market, they are becoming attractive prospects for mainstream firms looking to boost business.
More and more ordinary investors are also placing greater value on rapid-fire trading systems, provided by companies such as CyBerCorp, because they theoretically allow investors to get better prices. With competition in the business becoming more cutthroat, mainstream firms view these investors as good sources of revenue because they are very active traders.
"You can't ignore day trading anymore," says Greg Smith, an online brokerage analyst at Chase H&Q. "It's the fastest-growing, most lucrative part of online trading and this deal makes Schwab relevant in this area."
The deal also puts A.B. Watley Group, TradeCast and Tradescape.com -- CyBerCorp's biggest rivals -- in the enviable position of being takeover targets, analysts say. A.B. Watley, an online brokerage that offers similar trading technology, last month said it had hired investment bank Wasserstein Perella & Co. to explore potential "partnerships, alliances, and acquisitions."
Bobby Earthman, president of TradeCast, Houston, says his firm "has had major players talk to us," but has chosen to remain independent. "We have our own game plan," he says.
Mr. Amanat, chief executive of Tradescape.com, says he expects big brokerage firms to heighten their interest in firms like his as online brokerages start to cater more to active traders. "Our technology inspires loyalty," he says. "Wall Street doesn't have the level of connectivity that we offer, and it is going to have to get it."
James Marks, an online brokerage analyst at Credit Suisse First Boston, says full-service firms entering the online brokerage business, such as Merrill Lynch and Prudential Securities, may decide to make a bid for firms that focus on day traders.
Even though these firms have never catered to such market players before, Mr. Marks says they may have to as they develop their online trading operations because day traders are terribly profitable business. They conduct up to 10,000 trades per year, compared to only 25 for the average online investor, according to Chase H&Q.
Write to Aaron Elstein at aaron.elstein@wsj.com. |
