Datek Raises $300 Million in Private Financing

Backing will help shore up the company's balance sheet before its IPO, sources say.
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Datek Online Holdings

has drummed up $300 million in private financing from two U.S.-based venture capital firms and one French company, according to a company press release.

While Datek has chosen private financing over an initial public offering for now, it still could file for an IPO by next year's first quarter, according to three people familiar with the company's financing efforts and two other people who follow the industry. A Datek spokesman wasn't immediately available to comment.

Last summer, Datek was drawing up plans for an IPO until the

New York Times

, in an extensive story, reported that the company was under investigation by the Manhattan district attorney because of activities in its trading operations, which were separate from its online brokerage. And this year, as Datek was putting together its private financing, the company was hit by a

Securities and Exchange Commission

action. The agency last week

alleged that Datek essentially used customer money for its own operations.

Despite its troubles, the Iselin, N.J.-based company has signed on two large U.S. venture capital firms including

Microsoft

(MSFT) - Get Report

co-founder Paul Allen's

Vulcan Ventures

and Boston-based

TA Associates

. It also sold a stake to French holding company

Group Arnault

. Datek initially was looking for two or three investments of $100 million each, according to two people familiar with the deal, but another person with knowledge of the transaction says the final three investments were not of equal value.

Credit Suisse First Boston

, Datek's banker in the transaction, began bringing the firm together with a few large investors more than one month ago. Credit Suisse First Boston, which has perhaps the most well-known analyst in the online brokerage industry, Bill Burnham, declined to comment.

Datek is a power in the fast-growing online brokerage industry. According to Datek's Web site, the firm has 250,000 online accounts and averages 70,000 trades a day. That compares with Ameritrade's 428,000 accounts and 52,000 trades a day and E*Trade's 1 million accounts and 70,000 trades a day. It's the fourth-largest online brokerage based on

U.S. Bancorp Piper Jaffray's

industry rankings.

Datek also owns an electronic communications network,

Island

. It recently sold a 12.5% stake in Island for $25 million to

Waterhouse Securities

, a unit of

Toronto Dominion Bank

(TD) - Get Report

. Island is one of the two largest so-called ECNs, which are electronic systems that match buy and sell orders.

Datek's private financing round is designed to enable the company to remain competitive and help shore up the balance sheet ahead of the IPO by bringing in the financial weight of some substantial backers, according to two people familiar with the company's plans. Datek is competing against some online brokerages with deep pockets that have been spending exorbitantly on advertising in the race to gain market share.

E*Trade's

(EGRP)

advertising budget runs around $150 million a year, and

Ameritrade

(AMTD) - Get Report

is planning to ramp to spend $100 million this year. Datek is spending about $50 million on advertising in its current fiscal year.

One hint that Datek might have needed more capital came last week, when the SEC fined Datek $50,000 for essentially dipping into customer money on 12 occasions during the spring of 1998 to cover operating costs. Datek, which agreed to the censure without admitting or denying the accusations, attributed the problems to miscalculations by its former chief financial officer and stressed that no customers lost money.

Datek's problems with regulators date back to its days as a day-trading shop. The trading operation was sanctioned numerous times by the

National Association of Securities Dealers

during the 1970s. Then last summer, the

Times

said the Manhattan DA was looking into the trading operations. Datek said last week that the DA's investigation was nothing more than a rumor. The Manhattan DA's office declined to comment.

Datek has done a lot to distance itself from its past problems. In April of 1998, it sold the day-trading unit to

Heartland Securities

, which is located in the same building as Datek. Recently, it has gone through a management makeover, hiring a new online brokerage president, Edward Nicoll, from

Waterhouse

in January. Nicoll has since moved to chief operating officer of the holding company for both the brokerage and the Island ECN. The online brokerage is now headed by John Mullin, also formerly of Waterhouse.