Since the bursting of the Internet bubble, online brokerages have been buying and selling each other like over-caffeinated day traders.
Ameritrade, the largest Internet broker, has been one of the most aggressive. It has picked up National Discount Brokers, mydiscountbroker, and the online accounts of Brokerage America. But its biggest, and riskiest deal, was its takeover of rival Datek.
The 2002 purchase cost $1.29 billion and increased Ameritrades number of accounts by 50%, to 3 million from 2 million.
Growth meant survival. But growth also can kill. Unless Ameritrade could meld its systems effectively with Dateks, it might not have survived the collapse of the online trading business. "The short-term goal was to get the [information-technology integration] done—otherwise the company was going to sink," says Asiff Hirji, Ameritrades chief information officer.
Computer and communication systems are the engine behind any online brokerage, handling everything: taking orders, making trades, and keeping track of client accounts. But Ameritrade went from earning $1.06 on every $10 commission it charged traders in 2000, to a loss of 80 cents per commission in 2001. Absorbing Datek meant $376.4 million a year of additional business. But unless Ameritrade slashed costs at the same time, it could have foundered.
The technical takeover would not be simple. For starters, the company was without a chief information officer. Instead, its chief financial officer, Randy MacDonald, had to keep the integration on track instead and at the same time find a top technical executive to run the show.
Second, the only thing similar about Ameritrade and Datek was they were in the same business. Otherwise, "the two companies were different culturally, technologically, philosophically," says Hirji, a Bain & Co. information-technology consultant who joined Ameritrade as CIO seven months after the merger.
Ameritrade is a 27-year-old suit-and-tie financial services company; Datek was a dot-com start-up staffed by the sandals-shorts-Starbucks set. Ameritrade ran its business on Sun servers; Datek ran its operations on Intel-based, Windows PCs. Ameritrade was concerned with running a reliable and steady operation; Datek was interested in developing innovative tools for stock traders. This included Streamer, which allows customers to have a wide range of quotes displayed continuously on their screens, along with charts and trading-activity reports.
All this had to be meshed, without a leader of the technology staff. Right after the merger was announced, Ameritrade CIO Raymond Dury left and joined Barclays Capital as one of that banks top technology executives. Stepping into the breach was MacDonald, who would later note "the difficulty I had was, I have difficulty turning on my computer every morning.
The combined company functioned with interim information chiefs for the first seven months. But doing any kind of merger without an established CIO makes it harder to keep staff working on the right tasks at the right pace and tougher to make long-term decisions, Hirji says.
And there were many decisions to be made. One reason Ameritrade eyed Datek in the first place was its innovative approach to online trading. Datek had built a Windows-based system that allowed it to develop new online-trading tools quickly and speed orders to stock exchanges. Ameritrade wanted to bolt the best of Datek onto its computing platform and forge an even stronger information technology framework.
But how do you decide what systems stay and which ones go, without a CIO?
You decide based on whats good for customers—and shareholders, says MacDonald, a CFO with limited technology background. "Architecture is not something I tried to direct," he says.
MacDonald boiled decisions down to quantifiable comparisons of performance, functionality and cost. He called in Bain & Co. to evaluate the systems, set priorities and create teams to make the integration happen.
The three key pieces of technology for both Datek and Ameritrade were: the Web sites, which take customer instructions; the back-office systems, which coordinate applications and databases to verify the identity of customers, take their orders and execute the transactions with the right stock exchange; and the internal clearing systems, which make sure customer accounts are up to date.
One by one, Bain consultants evaluated each system. Their charge: rational, not emotional, assessments. It would be too hard, MacDonald felt, for Ameritrades staff to kill any of its own offspring. Nobody on a technology staff wants to hear "their kids are ugly," he contends.
When the results were in, Ameritrade decided to stick with its own clearing system, use some parts of each companys systems for handling orders, and create a new Web site from scratch that would feature many of the innovative tools Datek had developed, such as Streamer.
The choices extended to personnel as well. A staff of 600 at the time of the merger was winnowed, by merit, to 380. Of those, 100 came from Datek.
"In the technology world, this is not your classic merger where the acquirer nukes 90% of the staff of the acquired company and basically takes it over. Thats not what happened here," says Hirji.