It was June 2005, and Ameritrade Holding Corp. and TD Waterhouse USA had just agreed to merge in a deal that thwarted E*Trade Financial Corp.'s unsolicited attempt to buy Ameritrade. The deal created the third-largest discount broker in the U.S., while combining Ameritrade's low-cost trading platform and Waterhouse's expertise in wealth management.

The integration team members knew they would have a winning combination if they could merge the best aspects of both companies. They also knew that the competitive environment required that they move quickly. The task was to take the best products from each company and offer them in a combined Web site at an attractive price. What's more, since the products on offer in the industry are constantly improving, they had to upgrade some products or cut prices so as to minimize customer attrition once the deal closed.

But there was a catch. Ameritrade and Waterhouse were competitors, and U.S. antitrust law demanded that the two merging companies continue to act like competitors until the day their deal closed. They could not swap the sensitive information that was needed to come up with a new customer proposition.

"When Ameritrade and Waterhouse came together, the first thing we had to do was to understand what the gaps were between Waterhouse and Ameritrade,'' says Randy MacDonald, previously Ameritrade's chief financial officer and now chief operating officer at the combined company, TD Ameritrade Holding Corp. "But we were not allowed to talk price with each other in case the deal fell through.''

As a solution, MacDonald reached for an integration tool he'd used before, one which is finding growing favor among dealmakers facing similar problems: a clean room.

A clean room -- sometimes called a clean team or a pre-integration planning team -- is a service offered by consultants to help merging rivals integrate their businesses without violating competition laws. Since the merging companies cannot collude with one another before the deal closes, the consultancy sends in a team to meet individually with the two parties and to help formulate plans on sensitive areas of the merger, especially product prices. (Clean rooms, incidentally, should not be confused with data rooms, in which investment banks allow potential bidders to view confidential data from a company being auctioned off.) The clean room team studies confidential data, and makes recommendations that the merged company can implement as soon as the deal closes.

"We do a lot of merger planning with our clients and every year the number of clean rooms and the percentage of mergers using clean rooms increases,'' says Ravi Chanmugam, the partner in charge of Accenture's M&A practice in North America. "I would say 50% of the deals we are now working on are using some form of clean room.''

Chanmugam attributes the increasing use of clean rooms to three factors. First, large companies are using M&A more to buy competitors rather than to diversify into new businesses, so the competition concerns bear more heavily on the participants.

Second, there's increasing pressure from investors to realize synergies as quickly as possible. And third, customers are suspicious of consolidating companies so merger partners have to ensure customers perceive a smooth transition and preferably an improvement in service and price once the deal closes.

The concerns about offending regulators grew out of several high-profile incidents, the so-called gun-jumping cases in which the Department of Justice sued companies that acted as merged entities before they had closed their deal. The most prominent is probably the case of Islandia, N.Y., software company Computer Associates International Inc., which agreed to pay $638,000 in 2002 to settle allegations that it illegally coordinated business with its acquisition target, Platinum Technology International Inc., while their merger deal was still in Hart-Scott-Rodino review. (As well as the Hart-Scott-Rodino Act, gun-jumping can also contravene Section One of the Sherman Antitrust Act, the 1890 legislation passed to limit monopolies.)

"When I am advising on this area, the first thing that I tell people is that unless and until the merger is complete, you have to compete against each other,'' says Joe Tringali, a partner is the antitrust practice at Simpson Thacher & Bartlett LLP in New York. "You can't do anything you wouldn't do anyway (if the two parties were not in a merger or acquisition agreement).''

That is not to say that merging rivals cannot begin their integration planning before their deal closes. Lawyers and consultants say executives at combining companies can personally begin to examine facilities, some staffing issues and even information technology issues in the period between announcing and closing a deal. Accenture's Chanmugam says about 75% to 80% of IT integration planning can be conducted by company executives themselves. It's work on such things as proprietary IT applications that can affect competition that may require clean rooms.

Merger partners cannot swap confidential data that could affect how they compete with one another or other companies. So they obviously cannot work together on pricing their products, and the restrictions may also apply to such matters as their product offerings, the new products in their pipelines, their procurement contracts and even compensation for senior executives.

Many deals won't benefit from clean rooms. Companies that already know each other well because they have worked together in a joint venture don't need them. They're not needed in most real estate deals, either, because the acquirer is really just buying assets, nor in deals with quick closing periods.

Yet they can be used in some small deals. In a report last year, McKinsey & Co. consultants Nicolas J. Albizzatti, Scott A. Christofferson and Diane L. Sias divided the use of what they call clean teams into three levels of complexity, depending on the type of deal:

Library clean rooms, which gather and harmonize data to be used by the merger partners in their integration. This is generally best for small deals with short approval periods.

Facilitator clean rooms, in which the independent consultants analyze the data and then support the integration team as it brings the two organizations together. The clean room team can reveal to senior executives such matters as the value of anticipated synergies or the number of layoffs expected. After the merger closes, the new management can either adopt the clean room team's recommendations or ask them to modify them.

And designer-planner clean rooms, in which the consultants take on the job of helping to formulate the new entity's business plan, preparing its pricing and its product mix. The McKinsey consultants say that the designer-planner clean rooms require the most resources and cost, and also pose the greatest risk in the event the deal falls through.

The rules for what's a clean room issue can change as the pre-closing planning proceeds. Consultants say that as merging parties delve into their planning, they will refer just about everything to their lawyers, who may say certain subjects can only be dealt with by clean rooms or after a merger.

The size of a clean room team really depends on the size and complexity of the merger. The team always features a nucleus of outside consultants and can even include executives from the merger partners. A company executive joining a clean room usually has to be removed from day-to-day responsibilities and work full time with the clean room team. He or she may also be required to sign a special confidentiality agreement, and a separate undertaking not to return to any part of the business competing with the merger partner if the merger agreement collapses.

One other complexity involving clean teams is simply getting line managers to cooperate with them, or allow staff to join them. "Such managers claim that they need all of their time and resources just to manage the company's current work force and don't have the management bandwidth, the people, or the budget to staff a clean team,'' says the McKinsey report. "Their resistance may be well-intended, but it can cost a company dearly during the integration process.'' The team generally works in a special secure environment, either in a locked room with special security passes or online with unique security codes. If it is using data on a hard drive, often the computer does not have an internet connection, to ensure the material is not e-mailed to anyone.

One sensitive aspect of pre-integration planning is that mergers often take place as companies are planning for the next generation of products and services for their clients. So clean room teams often have to assess what new products should be kept, what should be discarded, how one merger partner's research and development could help the other company's projects or what is thoroughly incompatible and should be sold. Chanmugam says clean room teams have, for example, helped merging music companies determine what digital technology they should use for music downloads, and telecom companies decide what type of new phones they will offer once they have merged. And in pharmaceutical deals, he adds, it is common now for the team to examine the drug pipelines of the two partners, assess the cost of developing each drug and how far along it is and make recommendations on what should be kept and what should be discarded.

In the case of the Ameritrade-Waterhouse deal, the biggest challenge was to come up with a customer proposition that was price competitive and would meet the requirements of both companies' clients.

Ameritrade's MacDonald had previously tapped Wayne Cutler of New York-based consultancy Novantas to run a clean room when his Omaha, Neb.-based company bought Datek Online Holdings Corp. for $1.3 billion in 2002. And Ameritrade brought in Cutler again for the Waterhouse deal.

Cutler's first job, he says, was to meet separately with the CEOs and CFOs of the two companies to clarify the mission and get information. The meetings opened with the companies' lawyers reading aloud the pertinent regulations so all the senior executives knew how to proceed with the clean room. Cutler goes on to explain that his mission was to come up with a single value proposition that would retain customers from both merger partners and allow the company to grow.

A key decision was choosing the right "price point" -- that is, the headline price of executing a trade. That was difficult because Ameritrade had a flat $10.99 fee, whereas Waterhouse offered a gradated price structure of up to $17.95 depending on the type of trade. What's more, Waterhouse offered a deposit service, and the new product offering had to account for Waterhouse customers' expectations that this service would not be diminished.

After analyzing the data and the market, Cutler's team came up with a proposition of $9.99 a trade. "It was such a tremendous price for everyone,'' he said, saying it was simpler for Waterhouse customers and even knocked a dollar off the Ameritrade price.

About two to three months before the deal was due to close, Cutler began to meet with a few senior people to review the broad outlines of what his team had come up with. They were ready with the complete proposition when the deal closed in January, and TD Ameritrade was able to roll out the new offering for its customers in March.

"What we're seeing as a result is less customer attrition, more customer growth and a growth in trades,'' says MacDonald in an interview. The company originally forecast cost and revenue synergies of $578 million within 12 months of the close. MacDonald now believes revenue synergies alone will add a further $100 million to the total.By allowing Novantas to research its pricing and product mix while the deal was closing, TD Ameritrade probably launched its new customer proposition three or for months earlier than it would have otherwise been able to do. That's a whole quarter of benefits from the deal -- a fact that's obvious not just to customers, but also to analysts and shareholders. - Peter Moreira

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