Here is the article:
smartmoney.com
February 23, 2000
Crunch Time for Online Brokers
By Matthew Goldstein
WHILE MUCH OF the nation is caught-up in the "I Want to Be a Millionaire" craze, online brokers are tuning in to a more old-fashioned exemplar of the TV game-show genre: "Let's Make a Deal."
Ever since Charles Schwab (SCH) announced in early February that it was paying nearly $500 million in stock to buy one of the nation's leading online-brokerage services for day traders, the industry has been abuzz with speculation about the next big deal. Industry watchers say several small online-brokerage firms are now actively shopping themselves to bigger competitors, while in other cases it's the big online brokers doing the initial courting.
"My phone has started to ring. It did that right after the Schwab deal," says Barry Hertz, chief executive officer of Track Data (TRAC), the parent company of MyTrack ? an upstart online-trading service that caters to about 25,000 active stock traders. "The traditional online brokers are trying to differentiate themselves. It's good to be wanted."
For months now, experts and industry insiders have been predicting a wave of consolidation in the online brokerage business. With more than 150 firms now offering online stock trading, analysts say there are far too many brokers chasing too few customers. Even though an estimated 10 million Americans trade stocks online, it's becoming harder to find new customers. The cut-rate commissions online brokers charge only serve to compress operating margins and cut into net incomes. That price competition makes it all the more difficult for small brokers to keep pace with the bigger firms, which have deeper pockets to dig into and plan on spending more than $1 billion on advertising this year.
Yet up until Schwab's acquisition of Texas-based CyBerCorp, there really hadn't been many major deals. If anything, it seemed more brokerage firms were rushing to offer online trading. But the Schwab deal may have broken the mergers-and-acquisitions logjam. Some of the firms whose names most often come up in conversations with analysts and industry insiders about potential acquisitions include: A.B. Watley Group (ABWG), Web Street (WEBS) and Track Data. Analysts say the big online brokers are mainly looking for firms that, like CyBerCorp, boast an innovative trading technology and a lucrative clientele.
The one firm that seems to fit that profile nicely is A.B. Watley, a New York-based online trading firm that posted $20 million in revenues last year. Although small ? it has just 6,000 customer accounts ? A.B. Watley is one of a number of online firms that use a proprietary software program to provide investors with so-called "direct access" to the stock markets. That lets investors buy and sell stocks faster than they can through a traditional online broker like AmeriTrade Holding (AMTD). In addition, A.B. Watley's customers tend to be wealthier than the typical online investor. Timothy Butler, an analyst with Pacific Crest Securities, says the firm's average customer has an account balance of about $66,000, the kind of investor that a would-be suitor would find "very profitable."
Earlier this year, A.B. Watley executives helped fuel speculation that the company was for sale when they hired the New York investment bank Wasserstein Perella to consider "potential market opportunities." Naturally, A.B. Watley executives won't comment on reports that they are aggressively looking to sell the firm, but they acknowledge receiving a lot of interest from rival firms. "We retained Wasserstein Perella because we've been approached by a lot of firms that want to partner with us," says Anthony Huston, an executive vice president. Meanwhile, speculation that A.B. Watley may be sold is helping to bolster the firm's sagging stock. After trading around $10 a share for months, it's up nearly 50% in recent weeks. But the stock is still well off its $23 high.
In fact, the long slump in online brokerage stocks is another reason some industry observers say the climate may be right for a flurry of mergers-and-acquisitions activity. With many of these stocks trading near their all-time lows, it's never been cheaper for a big firm to acquire a smaller competitor. For example, JB Oxford (JBOH), a small online firm that often finds itself the subject of takeover speculation, is trading around $5.75 a share ? well off its 52-week high of $25.75. The hostile atmosphere for online brokerage stocks could also drive the privately-held players into the arms of buyers, since they'll have a tough time raising new financing through initial public offerings.
One of the last online brokerage firms to go public was Web Street, which raised $41 million in a November IPO. At one time the stock, which priced at $11, was trading as high as $19. It's now trading at around $7.25, well below the offering price. "The market smiled upon them and now they have the money to do marketing," says Michael Smith, an analyst with Fahnestock & Co., the lead underwriter on Web Street's IPO. "It's going to be hard to go public as an Internet broker in the future." Just this month, Web Street used some of the proceeds from its IPO to launch a $30 million advertising campaign. Smith says without the money to advertise, it's difficult for any online broker to add new customers.
So after several false starts, it looks like this may really be the beginning of crunch time in the online-brokerage business. |
