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E*TRADE: On the Auction Block?

Kind of like the boy who cried "wolf," no one seemed to believe that PaineWebber Group would be purchased. Rumors of a buyout have been present for at least two years.

Of course, there was a wolf and he arrived yesterday. UBS AG, a huge Swiss bank, decided to purchase PaineWebber for $10.8 billion (half cash, half stock).

Expect more of these mega mergers. After all, to be successful in the global financial services industry, there needs to be substantial assets under management, as well as broad product offerings. And there is something else: strong technology infrastructure.

This brings up E*TRADE . Like PaineWebber, E*TRADE has also been a perennial buyout candidate.

Over the past few years, E*TRADE has been been a trailblazer in high-tech finance. In fact, E*TRADE's technology infrastructure is proving to be highly scalable. For example, the company has joint ventures in nine countries so far. In the past quarter, E*TRADE launched branded services in Korea and Denmark.

E*TRADE is also a business model that works. In the past quarter, revenues grew to $407 million, which was a 152 percent increase from the same period a year ago. The company is not hemorrhaging losses. The company hit break-even last quarter (on an ongoing operations basis).

In all, the company gained 603,000 new customer accounts. Customer acquisition costs are falling -- down 13 percent from the prior quarter to $256.

A big part of the success of E*TRADE has been its creation of multiple revenue streams - many of which are synergistic. Perhaps the most notable is online banking. This was the result of E*TRADE's purchase of Telebanc Financial Corporation. Assets of the bank are at $6.5 billion.

Moreover, E*TRADE is becoming a broad-based financial services firm. The company recently teamed-up with Ernst & Young to create a new company that will provide financial advisory services. E*TRADE will provide electronic services - such as banking and brokerage - whereas Ernst & Young will deal with tax preparation, estate planning, retirement planning, and so on. In other words, E*TRADE is working on converging digital with brick-and-mortar.

The plunge in Nasdaq has been problematic for the online brokers. This has resulted in lots of damage to valuations. The 52-week range on E*TRADE is $13-1/8 to $40-1/2. The stock is currently selling at 16-1/2.

But investors have already discounted a reduced quarter for E*TRADE (because of falling trading volumes). However, the market is picking-up, which should add spark to online traders.

But if E*TRADE's stock remains depressed, the company will be an attractive buyout target. The company is #2 in the US Internet brokerage market with more than 2.6 million customer accounts. So, a purchase of E*TRADE would be an easy way to go digital.