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Acquired Taste

By Larry Dignan  |  Posted 2005-06-10 Print this article Print
Ameritrade chief executive Joe Moglia had a clear choice after E*Trade offered $5.7 billion to buy his Omaha, Neb.-based online brokerage: Be the hunter or the hunted.

Moglia is choosing to continue to be a hunter-for now. On May 12, E*Trade touted its offer, saying it "expected synergies of at least $650 million." Founder and chairman Joe Ricketts responded, "Ameritrade is not for sale.'' And Moglia said, "Ameritrade is a leader in consolidating this industry."

Meaning: Ameritrade is intent on differentiating itself through technology-and acquiring rivals.

In 2004 alone, Ameritrade bought Bidwell & Co. and the retail client accounts of BrokerageAmerica LLC, Investex Securities Group and JB Oxford & Co. for undisclosed amounts. In 2002, the company acquired discount broker Datek for $1.29 billion, which had merged with National Discount Brokers Corp. just a year earlier.

Baseline executive editor John McCormick and news editor Larry Dignan spoke to Moglia about technology management and his approach to integrating acquisitions, shortly before E*Trade made its offer.

BASELINE CEO: Ameritrade has been very successful merging other organizations and integrating their technology. What is Ameritrade's approach?

MOGLIA: There are no tricks. It's being as candid, and as honest, and as transparent as you possibly can be, with regard to the integration. Before we ever announced a deal [with Datek], we were talking about that deal for seven solid months.

Between the times you announce the deal and you close the deal, that's about another four or five, six months. So you've got quite a bit of time to determine whether or not this strategically makes sense.

If we're looking at a merger, a strategic acquisition or some sort of an alliance, we ask: Does this enhance our client experience? Does it help us grow market share? Does it stem attrition? Does it accomplish all those things that we're trying to do on our own?

If the answer is no, we don't need to go one step further. If the answer is yes, the second question is just as important, the growing of shareholder value. Can we do this in a way where all the numbers work for us? And at the end of the day, is it going to have a more positive impact on our bottom line?

If the answer to both is yes, you do everything you can to figure out a way to do it. Remember, we haven't even signed the deal yet. But as part of that, you've already figured out that this is good for our clients and good for our shareholders, and there are a lot of reasons why.

BASELINE CEO: So you move forward. How do you handle the integration and layoffs?

MOGLIA: There will be people that will be eliminated, not because they're bad people, but because we have people that can do that. So therefore their services become redundant. So, for shareholder value, we need to eliminate those spots. The biggest mistake people make is they want to keep everybody happy. Or they need everybody around while they're going through the integration, then they're going to fire them later. That's bulls---. That's inappropriate.

Using Datek as an example, we knew before the deal was closed that it would be far more efficient to use the call centers that Ameritrade already had. Within the first week after the close, we told everybody in the call center at Datek that we were going to do that. We told them how long we were going to need them. We told them what their financial package was going to be to stay there that long, and then we were going to give them some sort of a bonus. And that there would be an opportunity for some of them, if they were willing to move, to interview or be considered for a role in Omaha or Fort Worth, where our two other call centers were.

Everybody knew up front exactly what was going to happen to them. We erred on the side of taking care of them nicely from a financial perspective.

BASELINE CEO: So with the technology teams at Datek, people knew exactly what was going to happen six months or a year out? Is that why people were willing to stay and help with the integration?

MOGLIA: Yes. Now, one of the other things we did was tell Wall Street that we thought we could deliver $160 million in pre-tax synergies and savings. We told everybody that began on day one, when we closed the deal for Datek, that if we're able to deliver more than what we promised the Wall Street community, that there would be a one-time special bonus paid to everybody that was part of Ameritrade, whether you originally were Datek or not. Even if you were let go.

We closed the deal in September. I think by the end of October, the call center integration was finished. And all the people from the call centers were done, or were being let go. Everybody in that call center knew that they were going to get an incremental bonus above and beyond what we had already promised them if we were successful with the integration. We delivered $245 million, so probably about 12 months later, everybody got an incremental check for 47% above and beyond the bonus that they had accumulated for that year even if they hadn't even worked for Ameritrade for a year. I think people appreciated that.

BASELINE CEO: Integrating companies is clearly measured by the bottom line. What's the approach to technology management?

MOGLIA: We begin with the concept that technology is the product that we're delivering to our clients.

If you were at a full-service firm-a Merrill Lynch, for example, on the retail side-what they deliver to their clients is something that comes through a financial consultant. What we deliver to our client normally comes through a Web site, and technology provides that. So we look at it very, very much as an integral part of our overall business model.

Now, because it's such an intricate part of our business model, it has to be treated that way. Technology has to exist to be able to deliver something to clients, or to be able to deliver something to our shareholders.

The objective for us is to try to help our clients achieve their financial goals. So the mantra that exists in technology is that they want to deliver and enhance client experience faster, better and cheaper than anybody.

On the shareholder side, they've got to be able to balance what they're doing for the shareholders with what we're trying to deliver to the clients. So, by delivering it faster, better, cheaper, we obviously have to be as operationally efficient as possible.

BASELINE CEO: So how do you manage the costs?

MOGLIA: Technology has to deliver and enhance client experience, and figure out a way to provide greater shareholder value by keeping costs down.

Let's assume we have 400 people in technology. Every one of those people has to either be accomplishing one of those two goals or supporting somebody who's accomplishing one of those two goals. If that's not the case, I would expect those resources to be redeployed in a way where that would happen, or I would expect them to be eliminated.

BASELINE CEO: Executives have said that Ameritrade sees itself as a much of a software company as a broker. How do you see it?

MOGLIA: Now, my CFO, Randy MacDonald, and our CIO, Asiff Hirji, they know a hundred times more about technology than I do-and maybe I'm being conservative when I say that. So, I wouldn't be able to say we're as much of a software company, because I don't know exactly what that means. I just know that when we run Ameritrade, our technology organization is right there at the table with us.

BASELINE CEO: How do you manage your technology team?

MOGLIA: There are two pieces. We have an executive management team that includes all the key ingredients that make up a business organization. That would include human resources, finance administration, technology, private client, institutional business, the call centers and all those things.

But we have an office of the chief executive that consists of four people who really drive the strategic vision, and how resources are allocated to the rest of Ameritrade. The people who make up that are myself, the CEO; our chief information officer, Asiff; our chief financial officer, MacDonald; and our chief operating officer, Pete Ricketts, who's really in charge of the client experience. It's not an accident that the technology portion has that seat at the table.

BASELINE CEO: How involved do you get? Do you sign off on the major technology initiatives at the company, or do you trust your CIO and CFO to handle those duties?

MOGLIA: What would happen is, those types of things would probably have sponsors at the level of executive management team. If it were significant enough-in other words, a major strategic initiative-that would come to the office of the chief executive, the four of us.

So, the four of us at that table, we're not looking at you as the head of finance or someone in charge of a client. We're looking at the four of us and thinking, what are the smartest, best things Ameritrade can or should be doing?

If we think it makes sense, we will bless it and all stand behind it. Then we'll monitor that to make sure we are achieving certain prescribed metrics and have the right time lines, interactions and committees to make sure that we are coordinating that effort across all of Ameritrade.

BASELINE CEO: Would these be the bottom-line metrics, not so much the return on the technology investment?

MOGLIA: Bottom-line metrics is a good way to look at that, but that includes the return on the technology investment. But it also includes [answers to these questions]: Are we growing market share? Are we increasing the yield we currently have in terms of business that we do with our client base? Are we stemming attrition? Are people satisfied and happy with their relationship and their experience here at Ameritrade? That type of thing.

BASELINE CEO: Do you view every project through numbers?

MOGLIA: Well, sometimes you do it qualitatively, and sometimes you're making a decision based on the future. And you need good business judgment when you do some of that. It's not just numbers. There's sort of a science and an art form associated with all this.

BASELINE CEO: You went outside the organization to find a CIO. What do you look for in a CIO?

MOGLIA: [The position] had been open for a year. The number-one thing is that you would expect your chief information officer to be relatively competent in technology. So why don't we take that as a given?

If that's all it is, it's not that difficult a job to fill. At a place like Ameritrade, we wanted that chief information officer to have business acumen, so he or she could understand how relating technology to our business mattered.

That person also had to have a basic understanding of the client, because that's one of the two reasons why we exist. Also, some understanding of finance in general. I don't mean financial services. I mean our numbers and our balance sheet, because [the CIO] has to make a contribution to that.

Maybe that's coupled with business acumen, and maybe it's not. Then, our chief information officer has got to be somebody who is very much respected by the top people in our organization, because we want to count on that person for his or her expertise.

So it's not just technology expertise; it's an understanding of what the client really is in our organization, and an understanding of what it is to deliver shareholder value. And then, clearly, that person has to butt into the rest of our organization, because you've got to work closely with other people. The rest of the organization has to buy into that person.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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