Goldman Suddenly Has a Hulluva Presence Online

Goldman will spend $531 million to buy Hull, a market maker in derivatives. The deal is the latest in a string of e-ventures for the investment bank.
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Goldman Sachs

(GS) - Get Report

is quickly becoming Wall Street's e-octopus.

Goldman said Monday it would spend $531 million to purchase

The Hull Group

, a market maker in options, futures and other derivatives. Chicago-based Hull, founded in 1985 by former blackjack player Blair Hull, gets 67% of its net revenue from electronic trading, up from about 12% just four years ago. Hull also has built a presence in Europe by creating an electronic options exchange there.

The agreement marks the seventh time since December that Goldman, the premier white-shoe investment bank, has plugged into electronic trading -- an area derisively ignored by Wall Street until just recently.

When it became evident that the "fad" of cheap, online trading was going to let e-brokers steal business from Wall Street, major investment banks tripped over themselves to link up with electronic trading firms or to establish their own businesses. And Goldman has been one of the

most aggressive of the old-line brokerages.

"This acquisition highlights Goldman Sachs' strategy of expanding our electronic market-making capabilities," Henry Paulson Jr., Goldman's chairman and chief executive, said in a statement.

"With Blair Hull, we'll combine with an electronic market maker who is a leader in the evolution of equity markets," adds a Goldman spokeswoman.

Using the stealth it learned during its decades as a private partnership, Goldman worked so secretly on this deal that it even surprised the lead underwriter on Hull's

anticipated IPO,

Donaldson Lufkin Jenrette

. DLJ bankers were preparing for Hull's roadshow, which was to start Monday in Amsterdam.

The acquisition -- which will include an unspecified combination of stock, options and cash -- is Goldman's first use of its public stock as currency since the firm held its own IPO in May. Goldman approached Hull about the deal, according to one person familiar with the transaction.

Hull will retain its headquarters and its name. Blair Hull will remain Hull Group's chief, Goldman says.

Goldman's list of electronic initiatives already is long. It has a 10% stake in

Brut

and a 25% stake in

Archipelago

, two electronic communication networks, or ECNs, that match buy and sell orders and are taking market share from the exchanges. In addition, it has a 13% stake in online investment bank

Wit Capital

(WITC)

. Goldman also has created new online trading systems, and established its own system,

GS-Online

. With the Hull purchase, it will get a 5% stake in

Strike Technologies

, an ECN Hull invested in recently, according to one person familiar with that transaction.

Goldman is hedging its bets with the Hull purchase, says Bill Burnham, an e-commerce analyst at

Credit Suisse First Boston

. "When Goldman went public, I'm sure they had a shopping list, and now they are just going down the aisle," Burnham says. (Credit Suisse has performed underwriting for Goldman.)

The wedding isn't coming cheap for Goldman. The firm is paying 13 times Hull's 1998 pre-tax income of $40.6 million -- a hefty multiple compared to previous market-maker purchases that carried multiples in the low single digits, says Scott Kilrea, president of

LETCO DPM

, which makes markets in equity options at the

Chicago Board Options Exchange

and the

American Stock Exchange

.

"If the multiple for market makers is now above 10, then all of the big market makers will look to go public or sell at that price," says Kilrea. In this environment, specialists such as

Spear Leeds & Kellogg

,

Susquehanna Investment Group

and even LETCO could look at selling themselves if they could get such a multiple too, says Kilrea. A Spear spokesman couldn't be reached to comment. Susquehanna didn't return a call.

In addition, Hull's IPO would have given it a market capitalization of about $442.5 million based on its stated price range of $13 to $15 per share. So Goldman agreed to a price tag 20% higher than that.

However, Goldman's deal left some Wall Street watchers wondering how the bare-knuckle world of options trading fits within a large investment bank that has vowed to reduce its reliance on risky trading and diversify into more sedate, fee-producing sectors like asset management.

"We didn't intend to do this deal -- it was just too good to pass up," says one Goldman insider, requesting anonymity. Most Wall Street wags expected Goldman's first use of its new stock would be to purchase an asset management company. "This doesn't change that; we are committed to growing our asset management division," the insider says.