Will TD Ameritrade or Charles Schwab Buy Up E*Trade?

The economy is recovering and the stock market is picking up. It is time for TD Ameritrade (AMTD) and Charles Schwab (SCHW) to grab more market share. One acquisition target recently talked about is E*Trade (ETFC).

E*Trade has been under pressure due to its mortgage business. The stock is trading a little over $1.5 on Friday. Wall Street investors piled in to short the stock since 2008, and according to Nasdaq short interest report, ETFC has over 36% short interest as of 8/28/09, the highest among the SP500. However, several positive things are happening with this company for the moment. Its debt conversion program was approved by shareholders, housing prices are coming back slowly (a likely boost to its mortgage department), and trading actiivity is picking up speed lately, which usually is a good sign that its core business is in good shape.

Investors have been pushing AIG (AIG) and Citigroup (C) shares to rally because of the housing stabilization. E*Trade has over 15% market share based on the number of accounts. With E*Trade trading at such a low price, it is a steal for competitors to grab if they can. The rumors got one step closer to reality recently after CEO Layton said on 8/19 that E*Trade has always been approached with "vague ideas" from suitors regarding a potential deal, but the company has nothing to report.

Having said that, it may not be up to E*Trade to resist if shareholders' values are justified by a proper offer. For the long term, E*Trade should be a winner.

Disclosure: Author is long SCHW

Comments

[Nettligent:]

Buy E-Trade is a smartest choice. Spin off mortgage business, not sell it, and let a good management runs this operation.
Strong loyal customer base, supports, and employees.
The day ETrade announces major management shake up, stock will double within few week.
Make sure Buyer get rid of current management and Board of Directors without giving them any penny. Starting from the top and keep the rest.

Aug 30 04:29 AM

[Nettligent:]

When stock price recovers, Short is at high risk position and will disappear within a month.

Aug 30 04:31 AM

[sheep:]

Well, after October 2007 nobody is asking how could Etrade pay millions of severance for Micheal Kaplan...and the old shareholders lost billions of the share-value!
The last capital-increase (conversion of debt) was a full dilution for the old shareholders.
The burden of bad credit-portfolio still has to be carried over a longer periode but it´s time to see some improvement in the stock-price!

Aug 30 07:31 AM

[HATEFEEBAY:]

I have used E-Trade, Scottrade and Schwab. E-Trade is the WORST to deal with my far, even sold a margin account holding during the day and I was not holding overnight or the like (meaning my account was in great standing prior) because the stock dropped with 280ish K into it at a market order! Damn E-Trade, to me, it is the ghetto brokerage company of the year and with Schwab, it is terrific-like night and day. I trade about 30-500 trades a month and Schwab does cost me a few dollars more, but WELL worth it to me hands down. I fail to see a reovery of sorts and think we will dip hard again with the dollar going down, Swine Flu, lack of forward top earnings, rising unemployment, et cetera.

Aug 30 09:18 AM

[firefox2:]

I tried to open a non resident E.Trade account in their Palo Alto office, and ready to move a large chunk from Merril Lynch acct. to E.Trade, the fellow at the reception desk said I could not, and was less than helpful to inform me how I should proceed. I told him without reserve that as an E.Trade share holder I could not imagine that lack of enthusiasm for his company and that E.Trade certainly did not need his kind of workforce if they were to succeed and left. And in Palo Alto no less!

Aug 30 02:59 PM

[firefox2:]

That being said I am long E.Trade and strongly believe it will prevail or be bought out by a greedy suitor.

Aug 30 03:02 PM

[effeff63:]

Still selling covered call options on ETFC...if it isn't bought out, I win with the call premiums, if it is bought out @ $2.50 or better, I still win.

Aug 30 07:21 PM

[Mr. Stupid:]

Don't confuse Greed with SMART BUSINESS SENSE.

Mr. Stupid


On Aug 30 03:02 PM firefox2 wrote:

> That being said I am long E.Trade and strongly believe it will prevail
> or be bought out by a greedy suitor.

Aug 30 09:59 PM

[Jim Rich:]

Lets hope they aren't bought, but if they are and the bank is split from the brokerage then my brokerage money goes elsewhere. I'm a customer because I like the convenience of the combined services offered, and unlike some noobs that don't seem to understand there are trading rules, I am happy with their customer service as well.

Aug 31 06:52 AM

[ManAboutDallas:]

I don't want to see E*Trade get bought out, but if they are, it better be by Schwab. If it's AT, 95 accounts and $103 million walk out the door.

Aug 31 12:26 PM

[John Nelson:]

The dilution terms were much worse than I thought they would be. I think this stock is maybe worth $1 even if you try to estimate what normalized earnings power might be. I almost bought it myself because I have been so impressed at their underlying account metrics which have not suffered like one would have expected. After trying to model out the earnings power however, I decided it is overpriced. Basically, Kaplan's mistakes forced such horrendous dilution that the stock just isn't worth much.

Aug 31 02:11 PM

[Jerry Pham:]

I closed my Etrade account last year due to customer service issues. It wasn't much, just $40K but how many others did the same? I'm not too happy with Ameritrade either as they always have system outages and it always happens in the morning.

Aug 31 04:31 PM

[thelastangr...:]

It's Mitch Kaplan, not Michael. Get the small details right if you expect anyone to take you seriously.


On Aug 30 07:31 AM sheep wrote:

> Well, after October 2007 nobody is asking how could Etrade pay millions
> of severance for Micheal Kaplan...and the old shareholders lost billions
> of the share-value!
> The last capital-increase (conversion of debt) was a full dilution
> for the old shareholders.
> The burden of bad credit-portfolio still has to be carried over a
> longer periode but it´s time to see some improvement in the stock-price!

Sep 01 09:13 AM

[thelastangr...:]

It's Mitch Caplan, not Michael. Get the small details right if you expect anyone to take you seriously.


On Aug 30 07:31 AM sheep wrote:

> Well, after October 2007 nobody is asking how could Etrade pay millions
> of severance for Micheal Kaplan...and the old shareholders lost billions
> of the share-value!
> The last capital-increase (conversion of debt) was a full dilution
> for the old shareholders.
> The burden of bad credit-portfolio still has to be carried over a
> longer periode but it´s time to see some improvement in the stock-price!

Sep 01 09:15 AM

[Al the pal:]

Just because ETFC is a penny stock doesn't mean it is a low price. The company doesn't have any earnings and is expected to continue to lose money through next year. They haven't even made a dent in reversing their loan losses that continue to add up every quarter.

There are many obstacles to a buyout.

1. The huge debt/equity ratio. Restructureing the bonds didn't erase the debt, only the interest payments.

2. The order flow deals with Citadel. No buyer will want them.

3. Ongoing loan losses.

4. No TARP. Inadequete bank balance sheet.

5. A retail account base that has small account balances when compared to their peers Schwab and Ameritrade.

6. The huge amount of dilution that has occured and is ongoing. Most of the bulls fail to realize that ETFC has a secondary offering ongoing where they can continue to dilute their equity.

7. The huge dilution factor of the converible bonds.

8. Citadel- No one wants to have them as a major shareholder because they are a hedge fund.

Sep 02 02:32 PM

[HATEFEEBAY:]

LOL Trading rules-it seems you are referring to me here. I understand the rules well, I am a Wharton Alumni 03, double major and top of my class (you can Google me) and a registered day trader. I could pass a 6, 7, 63 test in my sleep but I own a tech company. E-Trade's service is horrible and if you have a margin account and are in good standing with no overnight hold, and them go 4X margin during the day, it should NOT be sold on you during the same day providing you sell to 2X or less margin before the end of the day. E-Trade's service is simply horrible, with many reps lacking basic knowledge but if I cannot trust my own broker, it is time to move on. Schwab has been a terrific company, I deal with the same guy there in Active Trader department and I cannot say enough good about the company and I have never purchased their stock just telling it like it is. E-Trade, or Ethiopian Trade as I call it is a joke company that caters to small investors, most of which have low standards or they simply leave as many on this thread have done. My time is money and I will GLADLY pay $2 a trade more for good service, and clearly I have shown that I will do so when I have, with no regrets, moved to Schwab.

On Aug 31 06:52 AM Jim Rich wrote:

> Lets hope they aren't bought, but if they are and the bank is split
> from the brokerage then my brokerage money goes elsewhere. I'm a
> customer because I like the convenience of the combined services
> offered, and unlike some noobs that don't seem to understand there
> are trading rules, I am happy with their customer service as well.

Sep 27 01:44 PM

[JW.USC:]

Sure they do. Riiiight.


On Aug 31 12:26 PM ManAboutDallas wrote:

> I don't want to see E*Trade get bought out, but if they are, it better
> be by Schwab. If it's AT, 95 accounts and $103 million walk out
> the door.

Nov 11 01:33 PM