Mellon Bank Will Acquire Pacific Brokerage Services

Los Angeles-based Pacific Brokerage Services Inc., a national leader in online discount trading, will be acquired by Mellon Bank of Pittsburgh in a deal estimated at more than $140 million, according to sources at Pacific.

The acquisition plan, expected to be announced today, would be one of the largest purchases of a Los Angeles brokerage firm in recent years. The deal would give Mellon Bank a discount brokerage arm. Pacific, which provides both traditional and online brokerage services, eventually would be able to offer a variety of additional products, including the Dreyfus mutual funds, which are owned by Mellon Bank.

“This is a powerful combination,” said Pacific President Steven Wallace, 55, who founded the discount brokerage in 1976. “This is like starting all over again on a new level.”

With the deal, Pacific would expand from its profitable niche of helping customers with discount trading of stocks and options on the Internet into offering mutual funds, money market accounts and other areas.

The price of the deal was not disclosed, but sources familiar with brokerages estimated it at more than $140 million. The deal is subject to approval of federal authorities.

Steven E. LeBow, a managing director at Donaldson Lufkin & Jenrette, helped represent Pacific in the sale.

Discount trading is one of the most competitive segments of the brokerage industry. Interest in online accounts has exploded in recent years; the number of such accounts doubled last year, to 1.5 million. By the year 2000, the number is expected to reach 10 million electronic brokerage accounts, a total of 8.5% of all retail assets, according to Forrester Research, a Cambridge, Mass., consulting firm.

Firms that offer online trading, such as San Francisco-based Charles Schwab, E*Trade Group and others, have sought to capitalize on this trend and gain market share by slashing commissions for investors who place trades online. Pacific, for instance, charges a flat fee of $15 per trade on the Internet.

With increased competition is expected to come increased consolidation. Pacific is not the first discounter to be acquired by a major national financial institution. Last year, Dean Witter Discover acquired Lombard Institutional Brokerage, a San Francisco-based discounter, for about $70 million.

The deal also would give Mellon Bank an increased presence in Los Angeles. Last year, Mellon took on significant office space in downtown Los Angeles and put its name on a building.

Pacific has more than $3 billion in 100,000 active customer accounts and takes from 6,000 to 7,000 orders on the Internet each day, Wallace said. Pacific has about 130 employees.

Pacific, which is owned by Wallace and his two sons, has more than $500 million in assets. It reported more than $50 million in annual revenue for the fiscal year ended in June.

But could tiny Pacific take a run at some of the massive market share enjoyed by its Northern California counterpart, giant discount brokerage house Charles Schwab?

“I personally think Charles Schwab is one of the greatest success stories in the industry,” Wallace said. “However, I believe there is enough business here for everyone.”

As part of the deal, Wallace will remain as president of Pacific for at least three more years. Pacific’s board of directors will be reorganized, and three representatives from Mellon will join the board.

Wallace, who lives in Beverly Hills, is a Philadelphia native who moved to Los Angeles when he was young. He is a graduate of Fairfax High School and a former Marine, and he is active in law enforcement issues.