E*Trade: Potential Ameritrade Merger Makes Sense for Both Companies

Great news for 3Com (COMS) investors as yesterday Hewlett-Packard Co. (HPQ) agreed to acquire the networking-equipment maker in a deal worth $2.7 billion in cash, as the computer giant looks to boost its offering of servers, storage and networking services. According to HPQ, the deal values 3Com at $7.90 a share.

COMS made the fund I manage and me a 277% gain in 1 year. My average cost is $2.10 a share. My last COMS article was a year ago (3Com Back on Sale).

I am very delighted to sell my COMS for $7.90 cash per share. I shall invest my gains into E*Trade (ETFC) which is now at $1.51 a share. ETFC offers investors a real bargain as it trades below book value and is expected to return to profits by the end of 2010. Analysts have become bullish over the past several months on ETFC. Goldman Sachs (GS) now holds 16 million shares of ETFC and will likely soon reiterate its ETFC buy rating with a $2.30 target.

I strongly believe TD Ameritrade (AMTD) will buy ETFC before the end of this year. In June of 2007, it was revealed that hedge funds JANA Partners and S.A.C. Capital Advisors sent a letter to AMTD saying they wanted to see the company pursue a combination with ETFC. The funds owned an 8.4% of AMTD shares at that time.

The hedge funds argued that a merger would "dramatically increase" shareholder value as a combination of two online brokerages would reap economies of scale. The funds estimated an AMTD-ETFC merger would create annual cost savings of $450 million to $500 million.

Now, it makes perfect sense for AMTD to buy ETFC as now all the analysts believe ETFC has turned the corner. It would take AMTD about 15 years to add 2.7 million brokerage accounts, or it could gain that amount in a flash by buying ETFC.

I believe AMTD will offer part cash and stock i.e. $1 share in cash and 10 shares of ETFC for every 1 share of AMTD stock, which is about a $3 a share value for ETFC.

Disclosure: Long AMTD, ETFC, COMS and GS.

Comments

[User 378520]

Jeremy,

You were accurate in predicting that the analysts would upgrade Etrade weeks ahead of the upgrades. I hope you are right this time as well! I have a large stake in Etrade and planning to add more.

Btw, what is the name of the fund you manage?

Thanks
eContrarian

2009 Nov 12 07:28 AM

[L B]

Jeremy,

I have been long on ETFC for some time and have been hoping for a acquisition as well. I picked some interesting news recently that seem to put pressure on the stock: Two days ago ETFC has the largest increase in Short Interest in the NYSE (+13.1%), see below

COMPANY Oct. 30 Oct. 15 NETCHANGE PCT CHANGE
----------------------... 108,699,116 96,080,532 12,618,584 13.1

from www.reuters.com/articl...

What do you make of this?

2009 Nov 12 07:42 AM

[Bashaw]

I think they would offer ALL cash seeing that AMTD has the cash to spend as the CEO has reiterated. Greg Bash

2009 Nov 12 08:24 AM

[wilson1854]

every time the stock go up the hedge fund how owen 960 millions share start unload the share last time this happen last month when the share hit 2$ every one include the company sold share i think who wrote this article is paid by the hedge fund

2009 Nov 12 08:27 AM

[Jeremy Richards]

Added note: ETFC board of directors scrapped a Stockholder Rights Plan that was essentially a "poison pill" set up in 2001 to prevent a hostile takeover of the company.

"The Rights Plan elimination improves corporate governance, while also increasing the likelihood of the company's eventual acquisition," said Matthew Albrecht, a financials analyst at Standard & Poor's Equity Research.

Also CEO is set to step down by years end. It all adds up.

I'm not paid to write articles. I am invested in ETFC and fully believe ETFC is the most undervalued financial stock on wallstreet.

2009 Nov 12 08:39 AM

[wilson1854]

i agree with you that the stock is undervalued but the story of the merger and the sale of the company is old story and again every time the price go up the company and the hedge fund start selling if the company think it is share is undervalued why they sold the stock at.1,68$ last month


On Nov 12 08:39 AM Jeremy Richards wrote:

> Added note: ETFC board of directors scrapped a Stockholder Rights
> Plan that was essentially a "poison pill" set up in 2001 to prevent
> a hostile takeover of the company.
>
> "The Rights Plan elimination improves corporate governance, while
> also increasing the likelihood of the company's eventual acquisition,"
> said Matthew Albrecht, a financials analyst at Standard & Poor's
> Equity Research.
>
> Also CEO is set to step down by years end. It all adds up.
>
> I'm not paid to write articles. I am invested in ETFC and fully believe
> ETFC is the most undervalued financial stock on wallstreet.

2009 Nov 12 09:31 AM

[Thomas Smicklas]

Don't own the stock, but I will add that ETrade has the best bond platform and pricing of all the online brokerages.

2009 Nov 12 09:58 AM

[Scott Martindale]

AMTD has their hands full right now with the thinkorswim purchase & merger. But stranger things have happened. It's true that a takeover has been rumored for a long time, but perhaps now is a more appropriate time in the financial sector & capital markets for it to actually happen.

2009 Nov 12 11:41 AM

[ManAboutDallas]

ANYONE but TDAmeritrade ! E*Trade will have such a mass exodus of customers TDA will think they've bought a skeleton when the bleeding stops.

Chase needs a retail brokerage operation; Capital One needs a better one than they've got now; Wells needs a better one than they've got now; ANYONE but TDAmeritrade!

2009 Nov 12 01:22 PM

[shacktown]

I'm LONG E*Trade as well....and really, the bottom line is how the mortgage backed securities play out........if it goes bad it will take the company down. But, their reported trends show it stabilizing. If this proves out, they are a top notch, fast growing online brokerage. The stock price will explode from current levels.

Until it is clearer, one way or the other, the stock will stay down and buyers will stay away. It looks to be going pretty good. I'm in. :.)

2009 Nov 12 01:45 PM

[Nettligent]

ETrade management has to go. ETrade Board of Directors need to resign. They keep making one mistakes after another.

2009 Nov 12 02:21 PM

[dividend_growth]

Etrade has a total loan portfolio of $21.468B, of which $2.302B has gone bad. The company has so far budgeted $1.215B for the losses. Is it enough?

During the latest quarters, delinquency rate seem to have stabilized, I'd like to wait another quarter or two to see whether it has truly stabilized.

2009 Nov 12 03:09 PM

[kmkkmk]

JANA Partners were pressuring AMTD to merge when ETFC was at $25. If AMTD would have caved to the pressure and merged at that time, it would be AMTD stock in the dumper instead of ETFC. I'm not sure I would be using the "wisdom" of Jana Partners to support my thesis.

2009 Nov 12 04:04 PM

[Jeremy Richards]

kmk AMTD was in talks before and I believe are again. ETFC's current stock price doesn't reflect the expected return to growth. I am told CITADEL is done selling.ETFC bank is off life support and has value again. ETFC should see an analyst upgrade or bullish note very soon.


On Nov 12 04:04 PM kmkkmk wrote:

> JANA Partners were pressuring AMTD to merge when ETFC was at $25.
> If AMTD would have caved to the pressure and merged at that time,
> it would be AMTD stock in the dumper instead of ETFC. I'm not sure
> I would be using the "wisdom" of Jana Partners to support my thesis.

2009 Nov 12 04:40 PM

[skess11]

No company is giving Citadel that kind of influence on their company with a stock deal. There were loads of investors ready to back this company and lots of institutions bought too.

With the thrashing Citadel dished out memories will be long and support for E may not happen. While I too looked forward to the return of this company Citadel's enormous selling at a key inflection point has soiled E to a low volume, range bound has been that has no interest from the street.

Nice pump and good try but as you can see no one's buying this baseless dreaming.

2009 Nov 12 05:24 PM

[protrader101]

So you must be short I gather? Well Citadel invested a huge amount when ETrade was in the high $4 range. Citadel sold some so what they HELPED save ETrade. This will move much higher buyout or not. AMTD is about 99% ready to buy ETFC says my broker at Smith Barney. Maybe AMTD stock price is being driven up & ETFC being held down for the offer to be accepted.


On Nov 12 05:24 PM skess11 wrote:

> No company is giving Citadel that kind of influence on their company
> with a stock deal. There were loads of investors ready to back this
> company and lots of institutions bought too.
>
> With the thrashing Citadel dished out memories will be long and support
> for E may not happen. While I too looked forward to the return of
> this company Citadel's enormous selling at a key inflection point
> has soiled E to a low volume, range bound has been that has no interest
> from the street.
>
> Nice pump and good try but as you can see no one's buying this baseless
> dreaming.

2009 Nov 12 06:14 PM

[skess11]

No I'm not a short. Just calling Citadel what I think. Had they not trashed the people investing while the upgrades were happening and all those hundreds of millions of shares were trading the buyout would be off a $3 price. Citadel isn't selling. E gives their flash trading all it's information with 40+% stock and almost all options going through Citadel.

It's Citadels cash cow for the info and market control for all their other activities. They don't give a hoot about the shares unless they can find a new sucker.

Believe me I wish it weren't so, but that's just the way it is.


On Nov 12 06:14 PM protrader101 wrote:

> So you must be short I gather? Well Citadel invested a huge amount
> when ETrade was in the high $4 range. Citadel sold some so what they
> HELPED save ETrade. This will move much higher buyout or not. AMTD
> is about 99% ready to buy ETFC says my broker at Smith Barney. Maybe
> AMTD stock price is being driven up & ETFC being held down for
> the offer to be accepted.

2009 Nov 12 07:41 PM

[Nettligent]

ETrade is dirt cheap for a very good reasons...starting with management and Board of Directors.

2009 Nov 12 07:58 PM

[redbeard20000]

Look at the trend in operating earnings the last 5 quarters. Should be pretty obvious that they'll be making a profit soon, if not this quarter. They've already built their loan loss reserves, now they're in the process of drawing down that reserve.

2009 Nov 12 08:23 PM

[Ricard]

Fundamentally ETFC is doing all the right things. Citadel has not sold additional shares since Oct 12. Short position is increasing (although still less than 5% of float), thus pressuring the price.

I've already taken this opportunity to DCA down. Time to just wait and see...

2009 Nov 12 08:30 PM