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Deutsche bids for NDB
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October 10, 2000: 4:11 p.m. ET
German bank bids $49 a share in cash; follows trend in buying market makers
By Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - Deutsche Bank AG, Europe's largest bank in terms of assets, offered Tuesday to purchase the rest of National Discount Brokers Group Inc. it doesn't already own for slightly more than $1 billion.
Deutsche Bank will pay about $1.02 billion, or $49 per share cash, for NDB's 20.9 million shares outstanding -- almost double the shares' closing price Monday. NDB shares shot up on the news, climbing nearly 90 percent, or $22.44 to close at $47.69 Tuesday.
NDB has received several merger inquiries from other firms and currently is reviewing strategic alternatives. It has hired US Bancorp Piper Jaffray and Credit Suisse First Boston as financial advisers.
 Deutsche Bank already owns about 16 percent of NDB and its various subsidiaries. In June, Deutsche Bank bought 3 million shares at $45 each in a private placement, NDB's general counsel and executive vice president Frank Lawatsch said.
The NDB-Deutsche Bank negotiations are advanced but the online brokerage still can entertain other offers, Lawatsch told CNNfn.com.
"Until we sign a deal we're not precluded from doing something with someone else," he said.
A Deutsche Bank spokesman declined to comment, and NDB declined to disclose any further information on the deal or when the purchase will be finalized.
General market conditions had caused NDB's shares to slump in recent months, falling to less than half their 52-week high of $59.25. NDB closed Monday up 6 cents at $25.25.
The Jersey City, N.J.-based NDB (NDB: Research, Estimates) is best known for its advertising campaign featuring a mallard duck and the slogan "We put you under our wing."
NDB, a top online broker, is also a Nasdaq market maker. NDB competes against other discount brokers such as Charles Schwab (SCH: Research, Estimates), Ameritrade (AMTD: Research, Estimates), E*Trade (EGRP: Research, Estimates) and Datek, as well as market makers Herzog Heine and Knight Trading Group (NITE: Research, Estimates).
More than online trading
Deutsche Bank is interested in NDB for its strong market-making presence rather than its online trading arm, analyst Paul Roukis, of Sidoti & Co. said.
NDB's market-making arm, NDB Capital Markets Corp., generates nearly two-thirds of its revenue, analysts said. NDB generated $20 million in revenue from its online trading arm, NDB.com, while NDB Capital had $46 million for fiscal first quarter 2001, Roukis said. However, NDB.com had $27 million in revenue, less than one-third of NDB Capital's $92.2 million in revenue for the three months ended May 31.
"NDB is one of the largest market-making firms in the U.S.," Roukis said. "This is purely a strategic move by Deutsche Bank."
Outside of NDB, only Charles Schwab has a market-making arm, Schwab Capital Markets and Trading, among the online brokers. Ameritrade does own 7.9 million shares in Knight Trimark but lacks a market-making capacity, analysts said. Schwab Capital Markets significantly outpaces NDB, handling 8.3 percent of Nasdaq share volume during the first half of 2000, according to data from AutEx, which ranks the market makers.
In September, Knight Trimark ranked first among OTC stocks with a 13.2 percent market share while Schwab came in second with 9.6 percent, according to AutEx. Herzog came in third with 7.3 percent, Salomon Smith Barney ranked fourth with 5.2 percent and Morgan Stanley placed fifth with 5.2 percent. NDB placed a distant last among the top ten, with 2.8 percent.
Deutsche Bank's offer comes at a good price for NDB, which was trading at around $25. Using Deutsche Bank's $49 a share bid means that online trading rival Ameritrade could be bought for $40, using similar estimates, while Schwab could go for as much as $60, said analyst Tim Butler of Pacific Crest Securities.
However, Butler downplayed the likelihood that Schwab would sell, considering it more likely that the online broker would seek to buy a rival.
Deutsche Bank's offer is the latest acquisition of a top market maker. In September, Goldman Sachs bought Spear Leeds & Kellogg LP, a leading securities clearing firm, for $6.65 billion in cash and stock. In June, Merrill Lynch paid $900 million for Herzog Heine Geduld, the third-largest U.S. firm linking buyers and sellers on Nasdaq.
It was the acquisitions of Spear and Herzog that caused NDB to reconsider its future.
"We saw two major competitors get acquired that were bigger than us and we think that gives them a significant advantage, having that access to huge capital and order flow," NDB's Lawatsch said. "What we saw was the face of the market changing."
The consolidation now leaves Knight as the only Top 10 independent market maker left, analysts said. Knight has been the subject of much speculation, with Morgan Stanley Dean Witter (MWD: Research, Estimates), Credit Suisse First Boston, Salmon Smith Barney and Citigroup (C: Research, Estimates) touted as potential partners. Rumors have surfaced that Knight has hired Robertson Stephens -- which consistently acts as Knight's investment banker on transactions -- to review potential deals.
On Tuesday, Schwab fell 19 cents to $28.94, Ameritrade rose by 88 cents to $15, and E*Trade climbed by 41 cents to $14.47. 
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