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Deutsche Bank May Want More Than NDB's Online Brokerage

The big bank may be chasing NDB to get the firm's market-making unit, as well as its online brokerage.

Online broker and


market maker

National Discount Brokers Group


finally has become the leader. But it may be because it has more going for it than just its online brokerage.

On Tuesday, the Jersey City, N.J.-based firm became the first online broker headed into the massive consolidation under way on Wall Street, when it said

Deutsche Bank

offered it $49 a share for the 84% of the company it doesn't already own. Deutsche paid about $45 a share this past spring for its first 16%. Now if this deal goes through, it will have paid about $1 billion for the 10th largest online broker and roughly the 12th largest Nasdaq market maker. (Market makers match buy and sell orders and help maintain orderly markets in stocks.)

But the deal isn't done yet. NDB said in its statement that it was also reviewing other offers. In fact, one person with knowledge of the situation said it was these talks that sparked Deutsche Bank to pull out its checkbook.But at a nearly 100% premium to Monday's closing stock price of $25.25, the Deutsche Bank offer certainly looks attractive.

NDB's stock was soaring, up $21.81, or 86%, at $47.06.

Investors were initially speculating that this purchase could lead to takeouts of online brokerages like


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. Up sharply in premarket and early morning trading, by midday, they had given up some of those gains.

And a closer look shows that Deutsche Bank, while obviously interested in the company's money-losing online brokerage when it took its initial stake, may be putting up the rest of the bucks for the market maker, which in the most-recent quarter kept the company from losing even more money. In the fiscal first quarter ended Aug. 31, the market-making unit posted pretax income of $7.2 million, compared with's

pretax loss of $8.7 million.

Even though the market itself is at an uncertain point, these trading shops are desirable on Wall Street. For instance, last month

Goldman Sachs

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agreed to buy privately held

Spear Leeds & Kellogg

. In addition,

Merrill Lynch


bought market maker

Herzog Heine Geduld


It's also NDB's market-making unit that makes Deutsche Bank's offer look more reasonable.

"At first glance it looks like a huge premium, but it isn't if you take a look at the multiple of revenues for the market maker and compare that to say Spear Leeds Kellogg and Herzog, which went out at three to 3.5 times the last 12 month revenues," says Rich Repetto, an analyst at

Putnam Lovell Securities

. (Putnam Lovell hasn't done any underwriting for NDB.)

In the 12 months ended Aug. 31, NDB Capital Markets, the market-making unit, brought in $300 million in revenue. Repetto suggests discounting the revenue multiple to about 2.25 to 2.5 to reflect that NDB's market-making unit is about one-half of Herzog's size. At 2.25, the unit is valued at about $675 million.

So of the roughly $1 billion Deutsche Bank will have paid for the company, that leaves $325 million for the online brokerage. And based on's 269,000 accounts at Aug. 31, the German bank is offering about $1,200 per account. That's comparable to where other online brokerages are trading. For instance, with a

market capitalization of $4.22 billion, E*Trade's 2.9 million brokerage and banking accounts are valued at about $1,500 each.

What this could mean is that the online brokerages still may have a little bit longer to wait to become part of the financial services merger action. Ameritrade, for instance, was at the

center of much investor attention in August after its chief executive Thomas Lewis stepped down. With the reigns back in the hands of founder Joe Ricketts, many thought the firm would be in play, but nothing has turned up yet. And E*Trade, which is owned in part by Japan's


, also has remained independent despite years of rumors that it would be purchased by everyone from Goldman to

American Express

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If the NDB deal goes through, two of the winners will be



and Paul Allen venture capital vehicle

Vulcan Ventures

. (The two are investors in


, publisher of this Web site.) The two firms bought 500,000 shares of the company at $27 last February for $13.5 million. In April they exercised warrants for another 500,000 shares priced at $33 each, for a total of $16.5 million.

Sometimes it's good to be first.