Competition among brokers in the United States of America is intense and the margins are low. Sales grew triple digits in 2010 but in 2011 the growth was barely 26%. 2013 could be even worse. It's time to expand overseas where there is less competition and higher margins.
Why sell one company to Scotiabank when you can sell two?
Craig McCaw was the highest paid CEO in the United States in 1990. If you need to move your stuff from Detroit to Chicago then you don't need to invent the wheel all over again. All you have to do is copy Craig McCaw's wheel and you will be fine.
Craig McCaw sold McCaw Cellular to AT&T (T) for $11.5 billion in 1994 just like Scotiabank bought ETrade Canada in 2008. All E*Trade needs to do now is copy his proven strategy.
A second after he sold his phone company to AT&T he decided to buy another one. He bought a very small phone company called Nextel in 1995 and after only 4 years and only $1.1 billion invested he increased the number of customers to over 3 million
In 2006 he sold Nextel to Sprint (S) for $36 billion. Times were tough for everybody back in 2008 including E*Trade and they were forced to sell their Canadian division. Without that sale E*Trade wouldn't be alive today, maybe.
The hurricane went away and now it's time to send the fishing boats back to Canada again. Open a few branches and get a few customers and try to sell the Canadian division again to Scotiabank for at least $1 billion in a few years.
E*Trade does not have to start from scratch. They can buy a small Canadian broker and grow it just like Craig McCaw did with Nextel. Upfront costs could be shared with other companies also interested in entering the Canadian market.
In 2006 Banorte from Mexico (A Forbes Global 2000 Company) entered the United States of America with the purchase of 70% of a small bank with 16 branches for just $259 million. They also have the option to buy the rest of the bank.
There are millions of Mexicans working legally in the United States of America and they send each week cash to their families in Mexico using banks with operations in both countries. They send over $22 billion each year. Even if Banorte charges a very small fee for each transfer it's still a very good business.
It's only a matter of time before they enter the Canadian market. There are millions of Mexicans working legally in Canada and they will switch from their current bank to Banorte if they enter the Canadian market. There are a lot of opportunities for global banks with operations in Mexico, Canada and the United States of America.
In the future more Mexicans will speak Portuguese and they will go to work in Brazil and vice versa. E*Trade needs to open a new branch in France and allow Canadian customers to buy and sell French stocks in Euros and vice versa.
It would be very hard for a typical customer from the United States of America to trade French stocks if he or she does not speak French. Canadians on the other hand are happy to trade in France because they share the same language.
The reverse is also true. French customers could be interested in trading Canadian stocks. If E*Trade Canada offers their website in Spanish then people from all over Latin America could start investing their life savings with them.
Here is another potential business for E*Trade Canada: Let's say I used to be a General Motors blue collar worker for 20 years in Detroit until I got fired and moved to Canada. It's hard starting over in a new country and Canadian banks are reluctant to issue credit cards to consumers born in the United States of America because their credit history is totally blank. You cannot just take your credit history with you to another country. You have to start over.
A special E*Trade Credit Card designed just for Canadians or Mexicans going to the United States of America or for Americans and Mexicans going to Canada could be a very profitable business. E*Trade already has access to your credit history in the United States of America and they will also have access to credit histories from any Canadian coming to the United States of America to work.
For the Mexicans going to Canada or the United States of America they may need to hire a company from Mexico like America Movil, (AMX)(AMOV) which already lends money in Mexico. Toronto-Dominion Bank (TD) cannot buy more than 45% of TD Ameritrade (AMTD) until 2016. It is highly likely that they will acquire the entire company after that date leaving J. Joe Ricketts with nothing but a pile of cash.
E*Trade cannot stop the bleeding
In Q3 they lost $29 million. In Q4 they lost $186 million. At this rate the Q1 loss will be $302 million or 100% of the revenues. Paul Idzik can still save the company. He needs to hire smart people with experience in small loans in Mexico and Canada. Current or former employees of Banorte and Grupo Elektra can get the job done quickly for very little cash. They may even accept options instead of cash.
It looks like E*Trade has only 4 years to start and grow a Canadian company big enough to compete against TD Ameritrade (100% owned by Toronto-Dominion Bank) that can be sold for billions to J. Joe Ricketts. He is not going to retire after the sale.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.