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News > Deals
Goldman buys Spear
September 11, 2000: 4:38 p.m. ET

Brokerage acquires NYSE's leading securities clearing firm for $6.65B
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NEW YORK (CNNfn) - Moving aggressively to keep pace with its peers, Goldman Sachs agreed Monday to acquire Spear, Leeds & Kellogg LP, a leading securities clearing firm, for $6.65 billion in cash and stock, a move designed to strengthen Goldman's ability to market directly to the growing ranks of retail investors.

The acquisition, expected to close by year's end, would dramatically reshuffle the rankings of top firms for executing trades for buyers and sellers on the various exchanges. Following the merger, Goldman Sachs will stand as the largest such specialist on both the New York Stock Exchange and American Stock Exchange, and the second-largest clearing firm on the Nasdaq exchange.

The transaction also completes an abrupt about-face among Wall Street's top brokerage firms, who historically have shunned retail investors for higher-volume institutional traders.

That attitude has shifted in recent months as technology advances allowed retail investors to grab a larger portion of the trading volume. In June, Merrill Lynch (MER: Research, Estimates) made a similar move, paying about $900 million in stock for Herzog Heine Geduld, the third-largest U.S. firm linking buyers and sellers on Nasdaq.

"They are getting one of the prime companies in both [Nasdaq market marking and securities clearing] for a multiple that we estimate at not more than 14 times earnings, so we think this is a very good deal for them," said Guy Moszkowski, an analyst with Salomon Smith Barney.

Goldman Sachs Chairman and Chief Executive Henry Paulson told CNNfn fundamental shifts in how the markets operate, driven primarily by the surge in electronic trading among retail investors, necessitated the merger. (753K WAV) (753K AIF)

graphic"We have no doubt that as the [New York Stock] Exchange changes, as there is more done electronically, I'm sure like a lot of functions the specialist function will evolve," he said. "But we have no doubt we're going to need those skills. We think the winning combination for the future is going to be strong people skills and strong technology."

Terms of the agreement call for Goldman Sachs to issue 34.4 million shares of its stock, valued at approximately $4.5 billion based on the company's closing price Monday, and $2.1 billion in cash to acquire the closely held Spear, Leeds, the No. 1 U.S. stock and option trade execution firm by volume.

Goldman Sachs expects the deal to add to its 2001 earnings by roughly 2 percent on a reported basis and by 9 percent on a cash earnings basis.

The brokerage expects to save roughly $50 million in expenses primarily through lower financing costs. That figure does not include the revenue synergies company officials expect to gain by combining the two operations.

Goldman Sachs does expect to take a one-time charge of $350 million to $400 million related to the creation of a $900 million fund being created to help retain Spear, Leeds top employees.

A highly profitable business


The 69-year-old Spear, Leeds operates in three core areas: securities clearing and execution; bringing buyers and sellers together on the floor of the NYSE, and uniting those parties electronically. Company officials said the firm has generated a profit each quarter for the last nine years and roughly 40 percent of its profit comes from its securities clearing business.

"Their business has been highly profitable and consistently profitable," Paulson said. "We looked at other comparable transactions that had been done ... but remember those are paying huge multiples on profit but smaller cost synergies. We said to make sense for us, we would like the transaction to be accretive immediately."

In addition to being the No. 1 specialist at the NYSE, Spear, Leeds also ranks as the top trade executor at the American Stock Exchange, while its SLK Capital Markets division trades some 7,000 Nasdaq and bulletin board stocks.

"It basically allows them to internally cross more of their Nasdaq volume," Moszkowski said. "It takes the number of stocks that they can make markets in on the Nasdaq up over 6,000 from 300 or so stocks they do now."

Though Spear, Leeds currently has only limited international distribution for its products, Paulson said Goldman Sachs would leverage its products across his company's global operations.

"We've talked a bit about global expansion and we see this as a very, very powerful driver here," he said. "We have a point here that the world is changing. There's no doubt about it, technology is going to be the driver. There's going to be a higher percentage of the trades done automatically, done electronically, as this process evolves. We're going to need skilled trading talent and SL has outstanding specialists. There's nobody doing what they're doing."

Spear, Leeds also is a major investor in electronic communications network REDIBook, one of the top U.S. electronic trading networks. Spear, Leeds competes against discount broker Charles Schwab & Co., Island ECN and Knight/Trimark Group Inc. (NITE: Research, Estimates).

Paulson said Goldman Sachs had some interest in the REDIBook operation, but considered it an "ancillary advantage," and didn't plan to make it a main part of the company's strategy moving forward.

Goldman Sachs has likewise started to sink resources into the Internet, entering an agreement last year with other brokerage firms to develop Primex Trading, an electronic auction site for stocks.

Goldman Sachs (GS: Research, Estimates) shares surged on word of the deal, jumping $8.06 to close at $132.31 Monday, just off its 52-week high. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.