Deal mechanic: Brokering a deal for Optionshouse

When General Atlantic decided to buy two retail options-trading companies, OptionsHouse and tradeMONSTER, in mid 2014, the growth equity firm was certainly familiar with the online brokerage business.

It had been an early investor in E*Trade Financial, although it had long since exited, and had maintained an interest in the sector.

“General Atlantic has a long history in the brokerage space, including the firm’s early investment in E*Trade,” says Paul Stamas, a principal in the firm’s New York office.
“Active retail trading, particularly related to options, is a growing and attractive niche.”

When the firm was looking to make a move for the two companies, it turned to an old acquaintance. It enrolled Mike Curcio as a consultant before the acquisition was completed, with a brief to become familiar with the management teams and help develop a strategic plan.

Curcio had led the brokerage at E*Trade before leaving in 2013. After his departure, he started a conversation with Peak 6, which owned OptionsHouse, about the possibility of pursuing a roll-up strategy. In the event, Curcio was involved in a different kind of deal.

“I was contacted by GA about four or five months later to discuss the possibilities of putting [OptionsHouse and tradeMONSTER] together and how that would look,” says Curcio, who became chief executive of the combined company.

Not only did Curcio and General Atlantic have the advantage of knowing the field, they also recognised early on that scale matters in the sector. “We knew that if we put those two companies together, we’d have a good probability of being very successful,” he says.
But the investment didn’t come without risk.

1- COMBINING CULTURES
The execution risk lay in the actual integration of the two companies. The pair were complimentary, but OptionsHouse and tradeMONSTER, although they operated in the same space and were both based in Chicago, had developed along very different paths over the years.

OptionsHouse was a stable business with a strongly institutionalised culture that had historically spent more on marketing than its competitor. TradeMONSTER had a more advanced technology platform, especially for mobile users, but it was smaller, more entrepreneurial and was growing more slowly. Combining the two made a lot of sense, but came with its fair share of obstacles.

“The two businesses were very different culturally,” says Stamas.
The companies also had disparate technology offerings. One of the main challenges was to integrate OptionsHouse’s customer base, which was roughly 10 times larger than that of its counterpart, on to the tradeMONSTER technology platform.

“We knew the conversion would be challenging because most of the revenue was from OptionsHouse, and their traders were used to a different customer experience,” Stamas says. “But we were also confident in the technology and the company’s ability to tailor the go-forward platform for both sets of customers.”

General Atlantic had to support two separate companies in two different locations, executing separate strategies, for the first three to four months. Ultimately, however, the team set up a well-defined timeline for a roll-up, and achieved it successfully.

2- FOCUS ON CUSTOMERS
The growth plan focused on several points. General Atlantic spent significant time working with the company to improve its digital marketing strategy to enhance customer acquisition. This helped to contribute to annualised account growth of more than 15 percent and core brokerage EBITDA growth of more than 30 percent, according to a person familiar with the matter.

The company also continued to invest in its technology platform, streamlining online and mobile interfaces, and adding future capabilities and elements that would help merge the two platforms.

“It was important for us to continue, even throughout the integration, to focus on our product and technology,” says Curcio. “That’s our bread and butter so we continued to invest in bulking up our technology and infrastructure, all geared toward making sure we were able to grow at an aggressive rate.”

The other focus was on customer service. General Atlantic made sure the company added tools such as white-glove services for some of its best customers. It also improved the customer service experience by adding personnel and reducing the average call-wait time.

“These initiatives were directly geared toward improving the customer experience, which we think had an impact not only on increasing top-line growth, but also on reducing customer attrition,” says Stamas.

3- IN-HOUSE RESOURCES
General Atlantic also brought in its ‘resources group’, which comprises professionals of diverse backgrounds including investment banking, consulting, technology, operations, capital markets, marketing, accounting and law.

Members of the group provided the company with expertise on digital marketing and customer acquisition as well as technology. Human resources experts also assisted the company with hiring and in building the board.

“Working in partnership with our management teams to add value to our portfolio companies is a fundamental part of the investments we make,” says Stamas.

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General Atlantic has the ability to hold investments for a longer period of time than the industry average, because it manages separate accounts, mostly on behalf of philanthropic families and their related foundations.

This makes the sale of OptionsHouse to E*Trade after only two years unusual for the firm. “We actually weren’t looking for an exit,” says Curcio. “We were not up for sale and had plans to continue growing aggressively. Fortunately, with the E*Trade deal, those plans are unchanged.”

“Some of that had to do with achieving the operational milestones we were looking to achieve more swiftly than we originally anticipated,” Stamas concurs. “We were in a position where the right next step for the company was in fact a sale to a strategic like E*Trade. This investment period was atypical for us, but the stars aligned for a deal with E*Trade sooner than anyone could have initially anticipated.”

General Atlantic declined to comment on the return it obtained from the sale, but E*Trade disclosed it had paid $725 million for the company. A source with knowledge of the transaction said General Atlantic generated a gross internal rate of return above 60 percent.