February 19, 1999
Merrill Lynch Is in Talks to Buy
D.E. Shaw Online-Trading Unit
By REBECCA BUCKMAN and CHARLES GASPARINO
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- Merrill Lynch & Co., under pressure to compete in the
online-trading business, is in talks to buy the online-brokerage technology unit
of securities firm D.E. Shaw & Co., people close to the negotiations say.
The unit, D.E. Shaw Financial Technology, makes software and other systems
that enable companies to offer online trading and other types of online
financial services, including banking and bill payment. If the sale proceeds, it
would mark the boldest move by Merrill -- the nation's largest brokerage
firm but a laggard in the online arena -- to jump into the competitive field of
online finance.
However, the move doesn't mean Merrill plans to compete head-on with
discount, online brokerage firms, whose commissions can be well under half
of Merrill's. Instead, Merrill would use the technology to bolster its
long-pending plan to offer investors a broad range of online services,
including trading at roughly the same fees it now charges for securities sold
through brokers.
Barring any last-minute hitches, the deal could be announced as early as
Friday, these people say. Merrill likely would pay $25 million to $35 million
for the software unit, according to a person with knowledge of the
transaction.
A Merrill spokeswoman said she had no comment when asked about any
acquisition involving D.E. Shaw, a hedge fund and securities firm that
announced a major restructuring in early December after the partial collapse
of a trading venture with BankAmerica Corp.
Merrill officials long have said they don't want to buy an online broker, but
would rather build their own trading system, which they insist is working
now. They have also talked about a broader "electronic commerce" strategy
involving selling other financial services over the Internet.
Though Merrill is testing its online-trading system with employees now, it has
repeatedly delayed the launch of its service during the past two years amid an
internal debate over how to adapt its business to the Internet. Lately, officials
have said they are doing further tests to make sure their new system can
handle today's heavy trading volumes on the Nasdaq Stock Market,
particularly in hot Internet issues. Merrill now says the launch could come as
early as the end of this month.
The D.E. Shaw unit, based in Cambridge, Mass., would give Merrill about 30
computer engineers, a person close to Merrill said, as well as a core trading
system Merrill could integrate into its existing one to handle higher trading
volumes. The unit also has software that immediately updates customer
account balances after online trades; Merrill's current software updates online
accounts once a day.
Buying the D.E. Shaw unit "would indicate to me that Merrill Lynch is maybe
having technical problems," says Bill Burnham, an electronic-commerce
analyst at Credit Suisse First Boston Corp. "Or, they're looking at the
problems other people have had technically, and this is a little insurance for
the future."
Merrill's chief technology officer, John McKinley, has said previously that the
firm's technology is robust. But a person close to the company says Merrill
has had trouble adapting its older systems -- geared toward serving its huge,
15,000-broker sales force -- to the new requirements of online trading. Much
smaller firms that specialize in Internet trading have been able to jump into
the business more quickly because they started from scratch, this person said.
In December, D.E. Shaw announced a restructuring and said it would lay off
25% of its employees, close its California office and sell several
securities-trading units. They included the financial-technology division as
well as FarSight Financial Services, a tiny online brokerage firm also based in
Cambridge that licenses DESoft financial software to other companies. A
person close to Merrill said the firm isn't interested in FarSight. |
