TD Ameritrade/E*Trade Merger Rumors Should Give Shares a Boost - Barron's

Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

TD Ameritrade / E*Trade by Kopin Tan

Summary: Online brokers TD Ameritrade Holding Corp. (AMTD) and E*TRADE Financial Corp. (ETFC) took beatings last week on weak earnings and 2007 forecast revisions. Ameritrade shares are down 40% since 2006 while E*TRADE shares have dipped 20% as recent market volatility, they say, scares away retail traders. Currently depressed prices give credence to merger rumors: Sandler O'Neill analyst Richard Repetto says the companies' overlap means a merger could trim at least 15% of combined expenses, boosting pre-tax margins to 59%. A joint company would create a serious competition for Charles Schwab Corp. (SCHW). Company managements are clearly open to the suggestion -- the two already looked at consolidation in 2005 before Ameritrade joined up with TD Waterhouse. It make take a few more quarters of weak profits, but merger prospects should create a price floor, and at current valuations, Barron's says both companies may be worth a look now.

Related Links: E*Trade/TD Ameritrade Merger Scenario [Revere] • Despite TD Ameritrade's Weak Quarter, Desjardins Remains Bullish On TD Bank • Online Discount Brokers: Disintermediation Won't Strike Evenly

Conference call transcripts: E*TRADE Financial Q1 2007 Earnings Call Transcript, TD Ameritrade F2Q07 (Qtr End 3/31/07) Earnings Call Transcript

Comments

[Saul Sterman]

I don't think this will happen as they couldn't get to first base then, now it will be even harder.

E*Trade is planning to increase volume by opening up Europe (FTSE, DAX, CAC) and Japan (Nikkei) to US investors. The only thing they are missing is a Seeking Alpha type website to cover these markets to guide investors and stir awareness.

Saul Sterman

[DavidJackson]

The fit is actually very good, because a merger would not only allow the companies to cut costs, but would extend E*Trade's banking offering to Ameritrade's customers, leading to stronger asset inflows, higher customer retention, and higher profitability per customer.

But it's not clear that the management succession issues could be easily solved,. It would probably take a much sharper decline in trading volumes that we've seen so far to push AMTD and ETFC into serious talks. So the Barron's speculation is probably too early.

Full disclosure: Long ETFC in my kids' accounts (from when I bought it at about $3 in the last downturn).