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Goldman Sachs to buy stock market maker


NEW YORK - Goldman Sachs Group Inc. agreed to buy Spear, Leeds & Kellogg LP yesterday for $7.5 billion in cash, stock and debt, making the biggest arranger of new equity sales the largest stock-market middleman.

Goldman will pay $4.4 billion in stock and $2.1 billion in cash, plus assume $1 billion in debt for the 69-year-old partnership. Goldman will also pay $900 million in Goldman stock to retain Spear Leeds employees, but the figure is not considered part of the purchase price.

Spear Leeds is the top specialist firm on the New York Stock Exchange and the No. 3 market maker on the Nasdaq stock market.

Combined, the firms will trade 8 percent of Nasdaq volume, making a market in about 6,400 Nasdaq stocks. It will trade 500 securities on the Big Board, as well as 200 stocks and 300 options on Amex.

The move suggests an about-face for Goldman, which called for a central electronic stock trading system in November, one that could lead to the demise of Big Board specialists such as Spear Leeds.

Goldman, which was joined by Morgan Stanley Dean Witter & Co. and Merrill Lynch & Co. in its call for reform, has since dropped the radical overhaul plan.

Goldman's purchase demonstrates the importance to securities firms of beefing up trading businesses, as commission revenue declines and competition from online brokers rises. Earlier this year, Merrill Lynch & Co. bought Herzog Heine Geduld Inc. for about $1 billion to become the No. 2 market maker.

"This is a very important strategy in terms of putting us in the center of the capital markets and capital flows in the secondary market," said Henry Paulson, Goldman's chief executive in a conference call. "This will give us market knowledge that we would have in many respects if we had a broad retail presence."

Investors signaled approval of the transaction, sending Goldman's shares up 6.5 percent to $132.3125. Typically, an acquirer's stock sinks on the first day a takeover is announced. Goldman's share price gains ranked among the top 15 percent of an acquirer's stock performance the day a transaction is announced, according to Bloomberg data on 141 acquisitions with a value of $5 billion or more since Jan. 1, 1999.

The decision by Spear Leeds to sell may reflect concern about having adequate capital to compete against electronic rivals and make a market in more stocks. The link to Goldman would also enable it to expand more quickly in Europe and Asia, Paulson said.

Andrew Cader, Spear Leeds' co-chief executive, said he had spoken to some of the firm's key clients and that the purchase by Goldman wasn't likely to disturb their relationship.

Spear Leeds, controlled by Peter Kellogg and his family, is on track to generate more than $1 billion in operating earnings this year. With 2,300 employees, the company earned $846 million on revenue of $2.7 billion in the nine months that ended June 30.

Trading firms are often shunned by investors because of volatile earnings. But Paulson, Goldman's chief executive, said Spear Leeds a profit machine that will smooth out Goldman's results. Speers Leeds has earned money every month for the past nine years, and settling trades for other firms for a fee is its biggest profit center, he said.

"It doesn't make a difference whether the market is going up or going down," he said. "What's important is the volume."

Goldman is also one of the top advisers to young technology companies, ranking No. 1 in taking them public and helping them merge. Having the No. 3 market maker on the Nasdaq enables the firm to be among the biggest traders of technology stocks.

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