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

by: Richard Jones October 13, 2008 | about stocks: AMTD / ETFC

Richard Jones

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With good reason, several stock broker friends told me its time to buy E-Trade (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 (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 (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 (BMO), and BrownCo, formerly a discount brokerage service of J.P. Morgan (JPM).

In July 2008, ETFC sold its Canadian division to Scotiabank (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.

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This article has 34 comments:

Oct 13 05:56 AM
Etrade (ETFC) if they are acquired by Ameritrade (AMTD) what would it mean for the shorts? I would like to find out if they are in talks. Why else are the two of these heavyweights so silent through this turmoil. They are the beneficiaries during this time. Etrade share price is so low. They have more cash on hand then the all the shares combined.
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Oct 13 06:05 AM
ETFC has to be respected for tackeling problems correctly.
"New trading" during these days, must be helping bottomline.
It is at least double from the current prices !
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Oct 13 06:51 AM
$5 a share for e-trade? That's a joke of a price. E-trade much better off allowing it's profits to normalize & get closer to $20/share imho
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Oct 13 10:08 AM
AMTD had better raise their offer if they expect to seriously be able to buy ETFC. ETFC has $1.4B in free cash on hand. A $4 offer would represent $2B roughly and would be a joke.

No, about $8-10 might do it, but $4-5 would not get it done. You are aware that Etrade's CEO, Donald Layton, spent $1M of his own money to buy Etrade shares at $4.07.

The merger makes sense, but at $4-5 it makes no sense.
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Oct 13 10:09 AM
I recommend the buy as well and I am long ETFC for full disclosure. Not sure if I buy into this Merger and the price seems ridicuously low for ETFC shareholders as the company has now started to rebound and unloaded the majority of all of its problems. The buyout offer would have been more legit about 3 to 6 months ago when the company was beaten completely down in the market. $8 to $10 sounds more realistic in my humble opinion.
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Oct 13 10:25 AM
One other point, due to the TARP program, an acquiring company would be able to pull Etrade's losses out and use them as a tax credit for the next couple of years. Thus, Etrade's expected future mortgage losses ARE A WASH because the acquirer would just be paying that in taxes anyway.

So they can acquire Etrade without worrying about mortgage losses. Further, Etrade has enough cash on hand at the bank $1.8B and at the parent $700M to pay off almost ALL OF THEIR DEBT.

So do the analysis, what is a debt free, no loss Etrade worth? It's got to be near $15 at a minimum. If AMTD could pull it off near $10 it would be a tremendous steal.

Then they might have a platform that runs without crashing all the damn time.
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Oct 13 10:55 AM
I would love to see TD aquire ETFC. However, $8-$10 would be more realistic. What sources stated AMTD would make an offer to buy ETFC???
I am long ETFC
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Oct 13 12:04 PM
I think the offer may be around 6-7 due to all the pay packages tied around stock options on the ETFC side. Next week's CC will be key to see where ETFC is through this mess. In addition, I believe that ETFC has gone through the cycle now for a year. PROVISIONS PROVISION PROVISIONS will be key.
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Oct 13 12:56 PM
Must not be a whole lot of truth to this merger or you would think the shorts would be running for the aisles and based on volume today, that is no where near the case.
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Oct 13 01:20 PM
true or not about the merger talk, ETFC is super discounted from the first false report on the bankruptcy and now the perfect financial storm. if the first report was near truth and the stock was able to bounce back, several months later and ETFC is in better shape than it was, there is no good reason for the price to be where it is at. once the market stabilized, i would think ETFC should be able to produce a smooth incline on the chart supported by its cash and business growth. i do agree with some people who says ETFC should be doing some stock buyback while the price is down.
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Oct 13 09:03 PM
Have the online brokers been profiting from the crash in terms of trading revenues? I would guess so but I'm not aware of any reports to substantiate that.
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Oct 13 11:32 PM
Won't happen. Etfc has a real problem. Bad paper. Won't go away by wishing. Sounds like a pump on junk.
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Oct 14 03:27 AM
Yeah- I bank there too. Look for Citidel to force a liquidatation that gives them them the plum and sticks the rest on the Govt. Citidel = Chicago and many spoils headed that way.
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Oct 14 01:23 PM
what jacobsen said is simply not valid and i wonder what his intention is.

ETFC started the turn around plan about a year ago and got rid of their toxic stuff very quick and only kept some with income producing potential. with the fed lowering the prime rate, it certainly helps the homeowners with heloc with the rate without hurting profit for etfc. with a recent market condition, many shorts had coverted their bet, we will not likely to see a "pop" on etfc anytime this year, but there are lots of cash sitting on the sideline just waiting for the storm to blow over. merger or not ETFC is a great brand name with very competitve products (prob. the best).... if anybody want's to invest in a brokerage company, ETFC is a better deal than AMTD or SCHW.
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Oct 14 02:23 PM
What is valid is that ETFC, is that while they moved their bad subprime portfolio to Citidel they duleted the shares to do that. They also thru away the good loans, I am a hnwi with top credit and cash in an account there. Now their heloc's are locked up when they decided to freeze indiscriminately. They sent out letters to heloc holders, i myself have recieved one explaining their decsision. IMHO- these guys either don't have the reserves to meet the helocs or are being told by Citidel to do things that will ultimately fit Citidel's ultimate agenda that equates to a slow motion raid. There must be something they aren't telling the market because all the rational explanations are missing.
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Oct 14 04:52 PM
This is one more in a long line of buyout rumors for E*Trade. I won't debate the same old arguments here, but I'll say this... if E*Trade is to be bought out, the offer will likely be higher than $5/share or no one will go for it. Don Layton put $1M of his own money into E*Trade at $4 and change. Most of his compensation is tied to stock and the PPS.

If someone offered me $5/share for E*Trade tomorrow, I'd say HELL NO. It would still be a decent profit for me, but I ultimately think it's worth a lot more if you can hold on for a year or two more. If you start talking about $7 - $10, now you have my full and undivided attention. However, I also think that's an unrealistic expectation since the PURCHASING company would be flamed by THEIR stockholders for paying multiple times the market price for E*Trade without a clear resolution to the HELOC portfolio.

If the government can help solve that problem with remaining HELOCs without major dilution... then we may just see a solution brewing that includes a merger or buyout between E*Trade and AMTD or SCHW. Until then, E*Trade will go-it-alone!
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Oct 14 11:30 PM
Why hasn't the author addressed the fact that the TARP plan means the losses are a wash for any potential acquirer.

I mean, would you rather pay taxes or use that money to acquire a competitor and offset losses.

How can any fool think that $4-5 would be reasonable. Aside from all the conspiracy theorists that post here and elsewhere, ANSWER THAT QUESTION OR JUST SHUT UP.

If I can hear one reasonable answer to that point, then they would have a point. If not, they are just liars.

The TARP program gives a potential acquirer a loss-free (due to tax credits), debt-free (Etrade has free cash to pay down all debts just about) brokerage.

So, what is a debt-free, loss-free, perfectly healthy Etrade worth? $4-5/share. I think not.
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Oct 15 12:17 PM
raycharles,

i have not read any actuall share dilution on ETFC yet, can you provide a source for that info? i don't understand how fitting Citidel's agenda would equate to a slow motion raid on ETFC. perhaps i'm too simple minded but i think Citidel would enjoy the most profit if ETFC stock price goes through the roof and it would try it's best to make sure it happens that way.
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Oct 15 11:08 PM
AmeriTrade takes over E*Trade, my 35 E*Trade accounts with $5 million in assets all walk.
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Oct 16 12:37 PM
wgat bad paper does e-trade have? They sold their CDOs portfolio to Citadel for something like 25 cents on the dollar. All they have is mortgages, which supposedly followed very strict underwriting standrads.
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Oct 17 12:01 AM
ManaboutDallas////////... ETFC accounts?????? Why would anyone ever need 35 accounts or are you just shooting off your manhole?

8/share seems a bargain for Ameritrade. ETFC will probably take 10 to 12 share because their balance sheet looks good. They don't need to be acquired anyway. Their a good enough standalone company as it is.

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Oct 17 11:48 AM
citidel could prob. buy enough amtd and etfc to push for a merger... that'll drive the bull value past schw and never look back.
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Oct 22 01:18 PM
I am a customer with E*trade with 6 figures capitalization. With a merger , I will move my assets elsewhere preferably OptionExpress
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Oct 24 01:55 PM
oh man when are they going to merge anyway!
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Oct 28 10:21 AM
In my humble opinion; ETFC is looking very attractive at todays PPS..
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Nov 10 04:41 PM
Do NOT use E*trade or buy their stock!!! I just had a FINRA case against them for delivering false AND misleading information to my account on their web site, then covering up evidence about the issue to cover their ass during the hearing. They deleted call records and lied about several documents and proceedures they use with their on-line customers. Their attorneys are the scum of the earth, and will lie with a straight face.They have very uneducated people answering the phones who are clueless...they are cutting costs at the expense of their customers. I use Scottrade now. Be on the look out for this story in WSJ...IT'S COMING OUT SOON. E*trade is going under!!!! Huge fines coming!!!!

On Oct 13 05:56 AM dan clue wrote:

> Etrade (ETFC) if they are acquired by Ameritrade (AMTD) what would
> it mean for the shorts? I would like to find out if they are in talks.
> Why else are the two of these heavyweights so silent through this
> turmoil. They are the beneficiaries during this time. Etrade share
> price is so low. They have more cash on hand then the all the shares
> combined.
Reply
Nov 10 04:47 PM
READ MY COMMENTS AT 4:41!!! GET OUT OF THIS STOCK!!!!

STOP THE NON SENSE WITH THE MERGER TALK, YOUR GONNA GET BLINDSIDED WITH REALLY BAD NEWS ON E*TRADE!
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Nov 11 04:48 PM
Mark, are you shorting this stock? Anyway, regardless of your response, you might be.
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Nov 13 05:03 AM
i have options for this stock to go down to 1.15 or lower by dec.5...what do u think ? ....gunna make a lot of money if it does....

On Nov 10 04:47 PM mark christo wrote:

> READ MY COMMENTS AT 4:41!!! GET OUT OF THIS STOCK!!!!
>
> STOP THE NON SENSE WITH THE MERGER TALK, YOUR GONNA GET BLINDSIDED
> WITH REALLY BAD NEWS ON E*TRADE!
Reply
Nov 13 01:40 PM
Mark,

That's a huge amunt of NEGATIVE remarks against ETFC...What specifically happened? Are you just short on ETFC? Or do you have something specific to say?

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Nov 13 01:48 PM
Mark,

I have had excellent customer service from ETFC! I think everyone should buy this stock! It's going to be worth at least 6-8 per share in the near future...

Be looking in the WSJ for ETFC to take over AMTD very soon! All shorters beware, it's time to go long ETFC!

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Nov 13 01:59 PM
My humble opinion= ETFC has been to easy to short for tooo long. This company has an excellent turnanround plan and they are executing it very well.

I hope all do well with this ETFC. However, those of you looking for stock advice on ETFC, you will mostly be led the wrong way if you're looking here for it.

2 words: DUE DILLIGENCE
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Nov 13 07:35 PM
LONG TERM GOOD.....SHORT TERM BAD..........BAD I SAY!!!!

On Nov 13 01:59 PM busajimmy wrote:

> My humble opinion= ETFC has been to easy to short for tooo long.
> This company has an excellent turnanround plan and they are executing
> it very well.
>
> I hope all do well with this ETFC. However, those of you looking
> for stock advice on ETFC, you will mostly be led the wrong way if
> you're looking here for it.
>
> 2 words: DUE DILLIGENCE
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Nov 19 09:03 PM
I love this company, but so far I have been very, very wrong on the stock. IF ETFC can make it out of this, I love the potential. Right now though, my investment is pennies on the dollar.
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