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.