4th and Goal

by Monte Burke

  Datek Online was a privately held online discount broker known for its proprietary technology, which conducted superfast, superaccurate web-based stock trades (the technology is what basically runs the NASDAQ today). Because of that technology, Datek had the most desirable group of clients in the entire online brokerage industry: 250,000 savvy, wealthy folks who made a lot of transactions.

  Joe wanted Datek and its accounts, but unfortunately, so did everyone else. Competitors E-Trade and TD Waterhouse were making bids. So were Wells Fargo and Bank of America, big banks looking for an entrée into online trading. The problem for Joe was that no one was taking Ameritrade seriously. “Datek’s investment bankers wouldn’t even give us the books to look over,” says Randy MacDonald, Ameritrade’s CFO. “They didn’t think we were legit.”

  Joe wasn’t deterred. Datek was owned by a group of private equity firms at the time. Joe correctly assessed Bain Capital and Silver Lake Partners as the company’s most influential owners. He badgered them. As always, he felt that if he could just get in front of them and sell them his plan in person, he could win. Joe finally got Steve Pagliuca, a managing partner at Bain, on the phone, and talked him into having dinner with him in Bain’s hometown of Boston.

  Joe met Pagliuca at Legal Sea Foods on Boston’s Long Wharf. He told Pagliuca of his plan to become the biggest player in online trading, then to begin to transform the company into an asset gatherer. He sketched out an outline on a paper dinner napkin. “He was pretty passionate,” says Pagliuca, now an owner of the Boston Celtics. “That certainly got the ball rolling.”

  Next Joe met with Glenn Hutchins, a cofounder of Silver Lake. He gave him the same pitch. Hutchins, too, was impressed with Joe’s fervor. “I wasn’t sure I agreed with Joe on the asset-​gathering strategy. I didn’t really find it that compelling,” says Hutchins. “But I did find Joe compelling.”

  In April 2002 Ameritrade acquired Datek Online for $1.3 billion in stock. The combined company, with three million accounts, became the biggest online broker in terms of trade volume. Best of all, the quality of the Datek customers meant that Ameritrade—​if all went well—would start making money again on trades.

  Ameritrade had taken the other bidders totally by surprise. “Honestly we didn’t even consider them a competitor at first,” says Frank Petrilli from TD Waterhouse. “We thought they weren’t going to do anything, since they were losing so much money.”

  But Silver Lake and Bain and the rest of the private equity folks liked what they saw in Ameritrade, and liked where Joe intended to take it, so much so that instead of going the usual route and cashing out after the sale, they decided to roll over their shares into Ameritrade. “We believed in Joe,” says Pagliuca, and they wanted to participate in his long-term asset-gathering plan.

  The purchase of Datek made perfect sense for Ameritrade. It combined the best customers and technology with a great brand name and distribution model. It was a necessary move for Ameritrade to ensure its survival. But there was significant danger in the deal: as with the NDB purchase, Ameritrade had to be able to fully digest Datek, or it would kill its host.

  Joe brought together the same team that had handled the NDB integration so well. Merging the two companies’ tech platforms and accounts would be arduous, but not impossible. The bigger challenge had to do with a culture clash: although the people in the two companies did basically the same thing, they came at it in very different ways and had completely different work environments.

  Datek was a hip, urban company, based in Jersey City, just across the Hudson River from Manhattan. “A lot of these folks were in their twenties,” says Asiff Hirji, a technology expert from Bain & Co., whom Joe would eventually hire as Ameritrade’s chief operating officer. “They had body piercings and tattoos and rode skateboards to work.”

  Ameritrade, by contrast, was still very much Ricketts’s vision of the “pride of the community” company, its employees gushing with Midwestern politeness and wearing blazers and ties and sensible shoes. Its headquarters, then and now, are located in an industrial park in southwest Omaha, right next to a Kellogg’s cereal plant. An east wind carries the scent of Frosted Flakes. A west wind is not so sweet: Ameritrade is also down the road from a pork-rendering plant.

  Joe realized that he had to make an emotional connection with the Datek troops or he would risk losing them and put the integration in jeopardy. He traveled to Datek’s Jersey City offices and called all of the employees together for a meeting.

  They were expecting an “aw-shucks” Midwesterner. Instead what they got was a passionate plea from a man whose speech was laced with the strong, never-to-be-lost traces of his New York City upbringing. Joe talked to these tattooed, twenty-something hipsters about his childhood in the inner city. He talked about his two friends who died and the others who, through their life choices, didn’t make it out of the ’hood, about how he had had to take responsibility for himself to make something of his life. “If you don’t want to work here anymore, that’s fine. I respect that. But if you do, you have to take responsibility to help make this work,” Joe told them. In other words, “be a man.”

  Hirji was there that day. “Joe has that gift that the best politicians have. He shares very personal pieces of his back story and makes it relevant, interweaving it into a bigger narrative,” he says. “He’s talking to a big group, but somehow you feel like he is talking to you and only you.”

  By Christmas 2002, the integration was moving along, but slowly. People on both sides of the deal were tired and short-fused, which resulted in bickering stalemates. Joe decided to have a Christmas party at his house in west Omaha. He invited all of the senior leadership from both Datek and Ameritrade. Most of the Ameritrade folks had their spouses with them. The Datek folks, primarily from the east, did not. Joe had hired a band. After dinner, the band started playing and people began to hit the dance floor. None of the Datek leadership was dancing. Instead, they sat around the tables and gossiped with each other. Joe knew he had to do something.

  With a grand flourish, he walked over to the tables, grabbed Hirji and pulled him onto the floor. He started dancing with him, violently twisting to a Chubby Checker tune. The Datek folks, as embittered as they were, couldn’t help themselves. They cracked up in laughter at this red-haired nut who was concentrating so hard and working himself up into a serious sweat. Joe had no problem making fun of himself to help a greater cause. “The mood of the party changed instantly,” says Hirji. “Also, it was the first time I’d ever danced with a man.”

  A few months later, the integration of Datek into Ameritrade was basically done. “This was a transformational deal and integration,” says Roger McNamee, a cofounder of Silver Lake and the venture capital firm Elevation Partners. “Datek took Ameritrade from being one of a bunch to being the one.”

  After losing money for two straight years, Ameritrade finished 2002 with a net profit of $131 million, a spectacular turnaround for a company that had been left for dead eighteen months before.

  With the Datek acquisition, Joe had pulled off something even bigger in the boardroom. He had turned Ameritrade into a real public company, with a real board and a more diversified group of shareholders. The acquisition meant that Ricketts’s share in the company he had founded went from 56 percent down to 32 percent. He was still the largest single shareholder and the chairman of the board, and still controlled three of the board’s eight seats. But the private equity folks, combined, matched his 32 percent share and had two seats on the board (while the remaining three seats were held by independent members). Joe had, in essence, convinced Ricketts to give up a degree of control of the company for the betterment of himself and the other shareholders.

  Joe kept pushing consolidation. From 2002 to 2005, Ameritrade snapped up four smaller companies with a combined total of 175,000 accounts. These purchases were important because of what they represented in sum, which was somewhat akin to what John D. Rockefeller had done 125 years earlier in buyin
g up dozens of small oil refineries in Ohio and Pennsylvania to build up Standard Oil.

  Each of these small fry was easily absorbed by Ameritrade, which no longer had to worry about choking on its food. Joe could now begin setting the stage for the next phase of the company, part two of the game plan he had sold to Ricketts in late 2000.

  Joe was only halfway to his goal at Ameritrade when football reared its head yet again. This time, though, it wasn’t a coaching job that was being dangled.

  In 2004 Joe got a surprise call from a well-connected friend who told him that the National Football League’s commissioner, Paul Tagliabue, was going to retire in 2006. The friend thought that Joe might be a good candidate for the job.

  Joe, of course, had never shaken the football bug. He’d been tempted to go back to coaching on a few occasions, especially when he got the call about the University of Buffalo job while at Merrill a decade before. But each time he’d decided he’d not quite played out his business career to its full extent. Head over heart.

  He’d always believed that if he were ever to return, it would have to be as a head coach. But the NFL commissioner job intrigued him. It seemed like a way to get back to football and use what he’d learned during his business career. His contract with Ameritrade was supposed to end in 2005. Though Joe believed he would be able to work out an extension if he wanted, the exit door was ajar. The question was whether he wanted to walk through it.

  But just as Joe started to put together a plan for pursuing the job, an opportunity presented itself. It was too good to pass up. It would give him the chance to complete his original mission at Ameritrade.

  By 2004 the online brokerage industry had undergone so much consolidation that it was now limited to basically five big players: Ameritrade, Charles Schwab, E-Trade, Fidelity, and TD Waterhouse. All of them save for Ameritrade now had banks and thus were already asset gatherers and not just online brokers. Ameritrade did have one advantage over its peers. It was far and away the best online broker. But if it was to take the next step toward becoming a financial superpower, Joe needed a bank.

  Joe put aside the idea of becoming the NFL commissioner. Instead, he signed a new contract with Ameritrade, one that would allow him to stay on long enough to accomplish his final goal. The most logical way to do that would be to partner up with one of the other big players in the industry. Over dinners and through countless hours of discussions, Joe learned that neither Schwab nor Fidelity, a private, family-run company, was very interested in partnering up. That left TD Waterhouse and E-Trade.

  E-Trade was run by Mitch Caplan, who, like Joe, had rescued his company from the dot-com meltdown. But unlike Joe, he had accomplished this in large part due to his company’s bank, which by 2005 had begun to purchase third-party mortgages.

  TD Waterhouse was run by Frank Petrilli, who had been a year behind Joe at both Fordham Prep and Fordham University (though the two had not known each other at either school). Waterhouse’s brokerage department seemed to be falling behind a bit in the online transaction race and its parent company—the Canadian bank Toronto-Dominion—appeared eager to do a deal, and had been impressed with how well Joe had delivered results in the Datek deal.

  Either of the two companies, because of their banks, seemed able to provide Joe with what he was looking for. The three companies soon embarked on what would turn into a wild, partner-swapping dance. First it looked as if Ameritrade and TD Waterhouse would link up. Then it was E-Trade and TD Waterhouse. Then it again appeared as if Ameritrade would be paired with TD Waterhouse.

  That company was Joe’s preferred partner. E-Trade had the better brand name, but after doing due diligence on the company, Joe was scared off by some of the assets held by E-Trade’s bank—specifically its third-party mortgages. “I had no idea at the time what a ticking time bomb those mortgages actually would turn out to be,” says Joe. But he knew enough to be wary.

  So Joe started negotiating with TD Waterhouse. However, he had serious problems back at Ameritrade. His board was not all aligned in its preference for Waterhouse. In particular, the founder and owner of the company wanted to pair up with E-Trade instead.

  Up until then, Ricketts had been willing to give up ever-escalating increments of his control over the company. With each company that Joe had bought from 2001 onward, Ricketts’s share of the company had shrunk.

  But now Ricketts had had enough.

  According to MacDonald and Hirji, Ricketts did not want to do a deal with TD Waterhouse because it was so large that it would dilute his shares to the point where he would no longer be Ameritrade’s largest shareholder. Ricketts believed that he could maintain his dominant position if Ameritrade went with E-Trade instead. “It was never really about the money for Ricketts,” says MacDonald. “It was always about control. Ameritrade was his baby.”

  MacDonald also says that Ricketts wanted his son, Pete, who was then chief operating officer at Ameritrade, to eventually take over the company. In a TD Waterhouse deal, that ascension seemed highly unlikely. As a result, Joe had some very dangerous shoals to navigate.

  In the spring of 2005, after tense back-and-forth negotiations, Ameritrade and TD (the parent bank) had worked out a deal for Waterhouse. TD would be effectively buying Ameritrade, becoming the company’s largest shareholder, grabbing seats on the board and paying Ameritrade’s shareholders a $2 dividend per share. Ameritrade—and Joe in particular—would remain the leaders of the new company. “That’s the way we wanted it,” says Ed Clark, the CEO of TD. “We believed in Joe.”

  But back in Omaha, Ricketts had been busy negotiating his own deal with E-Trade, undermining his CEO. According to Randy MacDonald, Joe was hurt by Ricketts’s actions, but continued to play the good soldier, trying to determine what was best for the shareholders.

  Ricketts eventually brought the deal he had negotiated with E-Trade to the table. It would allow him to remain the company’s largest shareholder.

  The board now had a clear choice.

  In the end, the board decided that E-Trade’s assets were just too risky, and they were set to vote for the TD Waterhouse deal. But the drama didn’t end there. At the last minute, E-Trade submitted a $5.5 billion hostile takeover bid for Ameritrade.

  Joe had expected the move from Caplan. He had remained in contact with him throughout the process. “We took a walk in Central Park one day and talked about it,” says Caplan. “Joe made it clear that he preferred TD Waterhouse, but if I were to win the deal, he just asked me to take care of his guys.”

  Joe still believed the TD Waterhouse deal was the right one for the long-term interests of his shareholders. His position was helped by the fact that E-Trade’s hostile bid scared TD into sweetening its own offer to Ameritrade. Clark boosted the dividend amount, from $2 to $6. Ameritrade’s shareholders would now be getting a lot of money upfront. “It was a safety valve for the shareholders,” says MacDonald. “If the marriage failed, they had a prenup in place.” But the decision was ultimately left to the board.

  This constant seesawing made Ameritrade a tense workplace. Though the employees knew nothing of the back-room dealings, they were aware that something big was happening that would affect their lives.

  Joe decided to take it upon himself to break the tension. He turned to attempts at levity. He did back and hamstring stretches on his office floor while meeting with his management team. During one particularly tense conference call with Wall Street analysts, Joe, unbeknownst to the others in the room, pushed the mute button on his phone. Then he started yelling: “We’re buying E-Trade! Woo-hoo!”

  “We all turned ghost white,” says Katrina Becker, the company’s media strategist. That is until Joe stuck out his index finger for all of them to see, then pushed the mute button off, and spoke calmly to the analysts. “We were all giggling like mad,” says Becker.

  And Joe liked to sing, just like his mother. But unlike his mother, he was not always in tune. A couple of times a week, his voice would boom from his office
. He sang Cher show tunes at the top of his lungs. He would pop in a CD and sing along to one of his favorite artists, Patrizio Buanne, an Italian baritone. He seemed to embrace Melville’s sentiment in Moby-Dick: “I know not all that may be coming, but be it what it will, I’ll go to it laughing.”

  After a few back-and-forth meetings, the Ameritrade board finally voted to go with TD Waterhouse. The $3 billion deal was made in June 2005. The new company would be called TD Ameritrade.

  On a conference call with those formerly skeptical analysts announcing the deal, Joe serenaded them with an Italian love ballad that began: “Your eyes shine like the stars.” This time, he did not hit the mute button.

  After the deal, a reporter from the Globe and Mail, a Toronto newspaper, asked Ed Clark about the negotiations. Clark replied: “You have no idea what a son of a bitch Joe Moglia is.”

  He meant it as a compliment. “Joe obviously preferred the deal with TD Waterhouse, but he never lost sight of who he worked for,” says Clark. “He was a tough negotiator. He did the right thing for his shareholders.”

  The largest single shareholder had been Joe Ricketts. The deal left him with 20 percent of the shares; TD was now the biggest shareholder, with 32 percent (with the rights to eventually go up to 45 percent). Ricketts’s son, Pete, resigned from the company shortly thereafter and went into politics.

  “Joe’s magic was getting the board to agree to this deal,” says David Livingston, who was the head of corporate development at TD. “He just gradually convinced Ricketts that this was the best deal for him, even though he’d no longer be the largest shareholder.”

  Says MacDonald: “Joe brilliantly maintained the ship while never publicly calling anyone out.”

  And he hasn’t to this day. Joe refuses to talk about any friction there may have been between him and Ricketts, though it had to sting that his chairman had tried to go against him on the company’s biggest deal. “I will always be thankful to him for giving me a shot to run this company,” he says diplomatically.