Discount brokerages are being snapped up faster than leftover bagels in the employee lunchroom. Both Mellon Bank and Fleet Financial Services recently picked up their respective firms, though for markedly different reasons.
Mellon makes no bones about the strategy behind its acquisition of Pacific Brokerage Services, an on-line discount brokerage firm that captures about three percent of the Internet trading market. "It would probably take us two to three years and a significant investment in technology to create the same systems environment that Pacific Brokerage Services currently has on the Internet," says Lawrence Cash, vice chairman of Mellon's Dreyfus Corp. "While there is a very active market and a growing market...it will probably be saturated and consolidated within the next three years. By the time we (would have had) our systems environment up and running, we probably would have missed the opportunity."
And while Mellon says it plans to grow Pacific's market share, it is not attempting to compete with the likes of E-Trade and eSchwab-category killers in that market. Cash says that Mellon will attempt to "maintain and perhaps grow" Pacific Brokerage's share of the deep discount on-line market, but the bank has no intention of taking any of the focus from its full-service investment products. The main goal of the acquisition is to exploit Pacific's electronic capability, "to do trading in our other brokerage entities within the Mellon universe," Cash says.
Fleet's acquisition of Quick & Reilly brings that bank an active on- line trading system; Quick & Reilly sources say electronic trading accounts for a rapidly increasing 13 percent of the firm's trades.
But industry analysts say that Quick & Reilly's QuickWay Net was just a pleasant addition to the deal. "I think it was something that was a freebie; it was thrown in," says Larry Cohn, director of research at Ryan, Beck & Co. "The real reason why Fleet buys Quick & Reilly is they want access to the Quick & Reilly customer base and they want access to the Quick & Reilly distribution mechanisms, in hopes that they can use Quick & Reilly as a platform for building their money management operation across all of the bank's products," Cohn says.
Fleet officials declined to comment.
Other banks that have opted to build their own trading capabilities may disagree with this acquisition strategy, but say whether it's build or buy, banks need on-line capabilities. "If you're a bank and you want to be serious about being in the investment business, you eventually have to come to the conclusion that this is a new way of doing things, and you have to offer it to customers," says Len Malkin, president Chase Investment Services. Chase built its own brokerage Web site because, "it gives us a lot of ability to customize and integrate with the existing on-line banking and other Internet Web sites that we have. ...In a lot of ways, it's a faster way of getting up. As you know, an acquisition takes a lot of time."