Internet brokerage firm Datek Online Holdings Corp. Friday reached the end of its six-month hunt for investors to buy out the 52 percent of the company owned by Jeffrey Citron, its former chief executive, and Sheldon Maschler, a former trader at the company.
An investor group led by Bain Capital, and also including TA Associates and Silver Lake Partners, has agreed to put up $700 million to acquire a majority interest in closely-held Datek and its Island ECN Inc. unit, operator of an Electronic Communications Network (ECN) used in electronic trading.
Datek has been seeking the investment to distance itself from the cloud of controversy that has hovered over the company since Citron and two associates were cited for violating National Association of Securities Dealers rules. Citron left his management position at the the firm in October 1999 but held onto his nearly one-third stake in the company.
“Datek has been the subject of several investigations in the past,” said Datek Chairman and Chief Executive Officer Ed Nicoll. “We certainly believe that in order to move forward as an organization that we need to move beyond the associations of the past…We think this is a transformative event for our company. The entire management team is excited to get back to work.”
He added, “The matters under investigation concern a predecessor organization and most importantly they concern a business that we haven’t been in for more than two years.”
After the transaction is complete, the founding shareholders of the firm will hold zero of the company’s controlling shares, though Nicoll said they will maintain a “stub economic stake” of less than 10 percent.
Under the terms of the deal, Datek’s current management, led by Nicoll, and the investment group will acquire all voting shares of the company from a group of original shareholders, including Citron, for about $500 million. The remaining $200 million of the investor group’s investment will go back into the company. Additionally, the investor group will spin off Island — which handles nearly 13 percent of all Nasdaq trades — and Datek will cut its ownership in the company to less than 10 percent from the nearly 85 percent stake it currently has. Island’s current management and members of the investment group will compose the company’s new board of directors. Nicoll said he expects the deal to close in about two weeks.
“Our new partners will put us in a strong position to build on the many successes that we have already achieved,” Nicoll said, adding that the infusion of capital will help Datek develop new products and expand into new areas. Specifically, he said the investment allows Datek online to explore joint ventures and expand internationally in ways it couldn’t in the past. Also, he said distancing the company from the founding shareholders will make it easier to attract top talent.
“Datek and Island’s ability to increase market share in a difficult environment has proven the strength of their business models,” said Roger McNamee of Silver Lake Partners. “For the last two quarters, Datek Online’s brokerage unit has been growing at a faster rate than any of its major competitors. Island has been taking market share and significantly increasing its trading volume. Both Datek Online and Island are the technology leaders in their respective segments.”
The deal also has significant implications for Island, which has been seeking a listing as a for-profit stock exchange. Island’s spin off resolves ownership concentration and conflict-of-interest issues that could hinder its quest.
“We believe that this transaction is a significant step towards that,” said Matt Andresen, president and CEO of Island.
Credit Suisse First Boston Technology Group acted as placement agent in the deal.
