An Ameritrade-E*Trade Merger? Not as Crazy as It Sounds

Includes: AMTD, ETFC
by: Richard Jones

With good reason, several stock broker friends told me its time to buy E-Trade (NASDAQ:ETFC). They believe its now largely undervalued after trading near $4 less than a month ago. Now at $2.23, ETFC may soon receive a buyout offer from TD Ameritrade (NASDAQ:AMTD). Sources state $4 to $5 a share will be the offer from AMTD. A year ago analysts said ETFC could fetch between $10-$11 per share on a buyout deal. Now the book value is about $4.91 a share. Cost savings to an AMTD bottom line of a merger make a lot of sense now that ETFC has shed more of its banking assets creating a large amount of capital. 

The talk about ETFC being bought by another online brokerage has been circulating for a while. Lots of people have the misconception AMTD would overlap with ETFC on many of its services if they end up acquiring it. Not true! AMTD is more of a traditional on-line brokerage. ETFC has more going for it, with nearly just as many customers and a role in personal loans and mortgages.

In 2003, the Toronto-Dominion Bank (NYSE:TD) held talks to merge its TD Waterhouse discount brokerage with ETFC, but the two sides could not come to an agreement over control of the merged entity. In 2005, ETFC made an unsolicited offer for AMTD, currently the second largest US discount broker. AMTD instead purchased TD Waterhouse, with TD Bank holding a 39% stake in the new entity.

In 2005, ETFC acquired Harrisdirect, formerly a discount brokerage service of the Bank of Montreal (NYSE:BMO), and BrownCo, formerly a discount brokerage service of J.P. Morgan (NYSE:JPM).

In July 2008, ETFC sold its Canadian division to Scotiabank (NYSE:BNS) for CAN$444 million, as part of a program of selling off non-core assets.

In March 2008, ETFC named Donald Layton, formerly JPMorgan Chase vice chairman, as its new CEO. Layton had joined ETFC board of directors in November 2007, at the same time as the Citadel deal. Layton has been aggressively acting on the turnaround plan and the company has stabilized and is seeing the beginnings of a return to growth.

Good news for banks: Treasury Secretary Henry Paulson announced late Friday night that the government would buy part ownership in an array of American banks. I bank with ETFC bank.

Disclosure: No positions yet. Will buy some ETFC.