Waterhouse Investor Services Inc. Taking Over: Spring White Sale Prompted By Need To Boost Technology

At the same time, though, the chief executive of the San Diego-based discount brokerage that bears his name was weighing an offer from Waterhouse Investor Services Inc. that would soon take the firm’s independence and make it a subsidiary of a major bank.

But like many recent brokerage deals, this one, announced last week, was driven by the huge capital demands of technology and the desire to expand client assets and product offerings. Jack White, one of the nation’s oldest discount brokerages, has 135,000 accounts and $12 billion in assets. Waterhouse has one million accounts and $50 billion. Both offer mutual fund one-stop shops to the public and to financial advisers.

In fact, the addition of Waterhouse puts Jack White’s supermarket, No. 3 in the industry, closer to the top two, Charles Schwab & Co. and Fidelity Investments. Supermarkets offer funds from many groups under one roof, with consolidated account statements.

Combined assets in Waterhouse and Jack White no-transaction-fee supermarkets total $6.5 billion, still a long way from Fidelity’s $17 billion as of Dec. 31. Meanwhile, Schwab is way out front with current assets in its no-fee mart of $62.6 billion.

It turns out that Mr. White couldn’t envision a future for Jack White & Co. without an upgrade in the firm’s electronic interface capacity. And that would cost $20 million to $25 million, an amount that Mr. White did not want to raise on his own.

“More than 50% of our orders are coming in electronically,” Mr. White says. “Why invest in a platform when we could go with a partner that already has it?”

Becoming a subsidiary of third-largest discount broker Waterhouse, owned by Canada’s Toronto-Dominion Bank, also would give Jack White access to customers outside the U.S.

The deal is Waterhouse’s second acquisition of a California brokerage and gives it a stronger position in mutual fund marketing. Last fall it bought Kennedy Cabot & Co. of Beverly Hills for $155 million.

Inheriting the back office capabilities of Toronto-Dominion Bank is a relief for Mr. White.

“I’d wake up every morning wondering if I was in the brokerage business or the technology business,” he recalls.

And early last week, Mr. White also woke up a richer man — at least he will be when the $100 million cash deal closes. Mr. White and his family own 100% of the firm. The transaction is subject to regulatory approval and is expected to be completed by early June.

When Skip Schweiss, director of business development at Denver-based competitor DATAlynx Inc., saw the news about the deal, he said he stopped what he was doing.

“I sat up and took notice,” he says. “But when I read that they were going to be operating separately, I said, ‘Calm down.’”

Mr. Schweiss says the two combined entities are “significantly higher on the radar screen” than they would be separately.

“It remains to be seen whether the sum will be greater than the parts,” he adds.

The addition of Jack White complements the discount business of Waterhouse and fellow TD subsidiary Green Line Investor Services.

But it was White’s mutual fund marketing prowess that lured Waterhouse.

“We haven’t pushed it (the mutual fund business) as hard as the equity or fixed-income side of the business,” says Frank Petrilli, president and chief executive of Waterhouse Investor Services.

In fact, mutual funds make up less than 5% of Waterhouse customer assets vs. 35% at Jack White, Mr. Petrilli says. White has about $4.5 billion in its no-fee supermarket and offers 1,275 funds to retail investors and 2,600 to advisers.

Mr. Petrilli stopped short of saying the acquisition of Jack White is the first salvo in a war to knock Fidelity and Schwab off the top of the discount brokerage mountain. Still, he admits the firm has “a wide array of prospective customers” to boost the supermarket business. Waterhouse already has more than 1,000 funds and assets of about $1.8 billion in its own mart.

Waterhouse and Jack White also have adviser trading networks — with 1,200 advisers each. It’s too early to tell, a Waterhouse spokeswoman says, how or if the supermarkets will work together.

Both sides say Mr. White and his top management team will remain on board once the deal is completed. Mr. White will assume the role of chairman of the division but will not have a board seat at Waterhouse. He says he has no immediate plans to retire, although he concedes that he eventually will slow down.

Chief operating officer Bob Reed and executive vice president Peter Mangan will continue in their present roles. Mr. Petrilli says no layoffs are planned.

Related Topics: Mergers and Acquisitions