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Datek sells majority stake
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December 1, 2000: 2:55 p.m. ET
Investor group pays $700M for 70% of online broker, Island ECN unit
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NEW YORK (CNNfn) - An investor group led by Bain Capital paid $700 million Friday to buy a majority stake in Datek Online Holdings, the No. 4 U.S. online broker, and immediately announced plans to spin off the company's popular electronic trading network, Island ECN.
The deal, the largest private investment in an online financial services firm to date, gives the investor group, which also includes TA Associates, Silver Lake Partners and current company executives, 100 percent of the company's voting shares.
The investment will close in two weeks and Island, the No. 1 U.S. retail electronic communications network, will be spun out into a separately operating company at that time, Datek Chairman and CEO Ed Nicoll said on a conference call open to investors and media.
Nicoll, who will remain with the company, said the $700 million investment will go to Datek Online, which will use $500 million to buy back shares from founding shareholders, including Datek co-founder Jeffrey Citron. The rest will be used for expansion and investment in the firm.
"Datek has the technology and the resources to build on its current position as a leader in the online investment field and to elevate the standards for serving retail investors," Steve Pagliuca, a Bain Capital spokesman, said.
Boston-based Bain Capital has supplied private equity investments for many top-name firms such as Dominos Pizza Inc., Staples Inc. (SPLS: Research, Estimates) and DoubleClick Inc. (DCLK: Research, Estimates).
Iselin, N.J.-based Datek Online competes with other online brokers such Charles Schwab Corp. (SCH: Research, Estimates), E*Trade Group (EGRP: Research, Estimates), Ameritrade Holding (AMTD: Research, Estimates) and TD Waterhouse Group Inc. (TWE: Research, Estimates).
The ECN alternative
Datek formed its online brokerage under former CEO Jeffrey Citron in 1996 and immediately took aim at the Nasdaq and New York Stock Exchange markets by vowing to eliminate the need for market makers and save investors money. The operation now boasts more than 623,000 active accounts.
Island ECN competes directly with the Nasdaq market by immediately matching investors' buy and sell orders online, eliminating the need for a traditional market maker role.
Earlier this year, Island became the first electronic communications network to convert to quoting in decimals rather than the traditional fractions, beating both the Nasdaq and NYSE. The company traded more than 12.4 billion shares during the third quarter.
The investor group and Datek management combined will hold a 90 percent stake in Island with Datek's ownership dwindling to 10 percent of the ECN from 85 percent.
The new investors group will own at least 70 percent of Datek and 70 percent of Island, Nicoll said on the call.
Friday's investment is the first significant cash infusion in Datek since last year when the company, following a failed initial public offering, secured a $300 million funding agreement that included Microsoft co-founder Paul Allen and TA Associates.
An Island IPO?
Last year, closely-held Datek withdrew its IPO amid an investigation by the Securities and Exchange Commission and the U.S. Attorney's office into trade and lending practices at Datek Securities.
Investigations still are pending of predecessor firm Datek Securities, which was sold in 1998, a spokesman said. Datek Online's current CEO Nicoll, co-founder of TD Waterhouse Group Inc., succeeded Citron in October 1999 as head of the online brokerage.
Three-year old Island had operated as a subsidiary of Datek Online and now will become a separate company. However, Datek does not plan a public offering of Island soon, nor a Datek IPO.
"We are not in any way focused on an [Island IPO] right now," Nicoll said on the call.
However, Datek will investigate an Island IPO in 2001, executives said.
Island still is pursuing its plans to become a for-profit stock exchange, and the separation from Datek is a significant step in the process, Island CEO Matthew Andresen said.
"This is a transformative event for our company," he said. "We are excited to be separate from a corporate standpoint."
Becoming a separate company alleviates any perception of conflict involving the brokerage firm Datek, an Island spokesman added.
Andresen declined to name a timeline for when Island would actually become an exchange, saying only that it is up to the Securities & Exchange Commission.
Credit Suisse First Boston acted as the placement agent during the negotiations. 
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