E*TRADE-Telebanc: A Bounced Deal?

Divorce is never fun. However, in the case with
E*TRADE (EGRP)
and Telebanc (TBFC),
it looks like the divorce will come before the marriage.

It was on June 1, that the two companies announced their engagement to
merge and become a happy financial powerhouse. There would be tremendous
synergy, combining E*TRADE’s online brokerage leadership with Telebanc’s
online banking leadership. Telebanc was meant to bolster E’TRADE’s cross-border trading strategy as well.

But it looks like the odds are very strong that there will be no deal.
However, the problem with the deal is not economic; rather, it is
regulatory. Basically, Softbank owns 27% of E*TRADE. According to federal
law, there are rules against foreign companies owning more than 25% of a US
thrift. And Softbank, of course, is based in Japan.

E*TRADE hopes that it can successfully argue that Softbank’s control does
not fit within the federal rules on the 25%-rule. But this looks like a
losing argument. So, if E*TRADE loses, it will need to essentially become a
thrift and abide by the strict regulations. This is something E*TRADE is
likely not to do.

Ironically enough, regulatory problems can be a good sign. That is, the
government thinks that the combination may be too good. Still, the stock price of Telebanc has taken a beating, though it may be more of an opportunity.

The fact remains that Telebanc is a solid company, which has strong growth
prospects and would make an attractive purchase from many other online
brokerages (which do not have heavy foreign ownership). Online brokers are
scrambling to differentiate themselves. Purchasing an online bank makes
lots of sense.

Moreover, bankrate.com rated Telebanc as the top online bank, according to a
nationwide survey. A big reason is price. Telebanc’s True.net checking
account carries an annual percentage yield of 3.15, as well as a very low
fee structure. With a minimum of $1,000 in an account, customers get free
printed checks, free unlimited online bill payments, free ATM/Debit cards
and no monthly fees.

The company is profitable, with $2.1 million in net income last quarter on
$68.6 million in sales, compared to $57,000 in the same period a year ago on
$29.5 million in sales. Assets under management were $4 billion, making
Telebanc the largest pure-play Internet bank. In the same quarter a year
ago, assets were $2 billion. The company has more than 100,000 customer
accounts. What’s more, account acquisition costs have been declining, from
$185 per customer in the second quarter and $117 per customer in the third
quarter.

How to play Telebanc? The best approach seems to be to wait. If the deal
falls through, the stock is likely to fall even more. And the deal could
fall soon, as the deadline for the vote is late December. But once the dust
settles, the price could be quite attractive.