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E-Brokers: Who's a target?
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August 1, 2001: 5:09 p.m. ET
Discount brokers face heat as industry consolidates
A Weekly Column by Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - With the hot summer months upon us, the big four online brokers – Charles Schwab Corp., E*Trade Group Inc., Ameritrade Holdings Corp. and TD Waterhouse Group Inc. – might get whittled down to a power trio or even a top twosome.
Summertime is generally the worst time for online brokers. Retail investors don't pay as much attention to trades, choosing to spend more time at the beach than looking for the next hot stock.
These doldrums might be the breaking point for online brokers. Already, the companies have taken some tough defensive tactics to help them withstand the broad market slump – chopping staff, slashing ad budgets, and lopping off other extras.
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Luisa Beltran
covers mergers and IPOs for CNNfn.com | |
"The first half was a very rough time for online brokers," said analyst Rob Sobhani, of Banc of America Securities. "Their business models have been pushed to the limit and thus far they'd done a good job of rationalizing their expenses."
The question now is how much can they endure? In 1999 and early 2000, online brokers were at the pinnacle of their success and often compared to institutional behemoths like Merrill Lynch or Morgan Stanley. At the height of the day trader euphoria – April 1999 – Schwab even traded at close to $60 a share.
But the mighty have fallen. Trading volume for online brokers has dropped about 20-to-40 percent this year, analysts said, while stocks have plummeted. Both Menlo Park, Calif.-based E*Trade (ET: down $0.14 to $6.34, Research, Estimates) and Ameritrade (AMTD: up $0.16 to $6.60, Research, Estimates) shares have fallen 70 percent from their 52-week highs while San Francisco-based Schwab (SCH: up $0.26 to $15.25, Research, Estimates) has dropped 63 percent. New York-based TD Waterhouse Group (TWE: up $0.20 to $9.52, Research, Estimates) has shed the least, 55 percent, from its year high of $20.93.
Up for sale?
Now that the online brokers have fallen back to earth, speculation is rising that some may get bought out. The most obvious? Omaha, Neb.-based Ameritrade, say analysts, despite recent management moves.
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Joe Moglia
CEO of Ameritrade | |
"They did lay off staff and deserve credit for reorganizing," said analyst Eric Wasserstrom of UBS Warburg. "But this still doesn't get to the heart of the issue which is they need to find more sources of non-market sensitive income."
"They're a little light on the cash right now," Sobhani of Banc of America Securities agreed. "They didn't raise the financing as some of the others did recently."
On the hunt
But fresh off the heels of its NDB.com buy, CEO Joe Moglia argues Ameritrade is more an acquirer than a target right now. The Midwestern broker has the advantage because it is the lowest cost provider in the industry, he said.
To execute a trade, Ameritrade charges about $13.25 a pop, analysts said. The next cheapest broker, E*Trade, charges twice as much, Moglia said.
Ameritrade will have slashed its debt to equity ratio to 18 percent from the previous 104 percent when the NDB.com purchase closes in a couple of months. The broker once spent as much as $70 million a quarter on marketing but spent only $18 million in the last.
"We've been able to do all those things in one of the most difficult markets in history," Moglia told CNNfn.com. "If that's what we are able to do in tough times think what will happen when the tide turns."
Moglia declined to comment on speculation that Ameritrade was in takeover talks with Canadian Imperial Bank of Commerce back in May. CIBC was offering to pay between $9-to-$10 a share, or $1.8 billion for the broker.
Instead, the focus for Ameritrade is to grow. Opportunities for discount brokers will continue as the market is expected to hit 40 million online investors – in just the United States – by the year 2005, he said. Europe is still only in the initial stages of investing and prospects are also high for the Pacific Rim and Japan.
"We are looking at other opportunities," Moglia said. "If it makes sense for clients and shareholders, then it's something we want to do."
Schwab wannabes
Ameritrade would do well to take a cue from Schwab, which is now trying to position itself as a Merrill Lynch of the online world, analysts said.
"Schwab is doing a really good job of diversifying their product base and building products to push through distribution," said Sobhani, of Banc of America Securities.
Schwab has even talked about buying a bank and offering more bank-related products. The nation's top online broker is still considering such a buy but no timeline is available, spokesman Glen Mathison said.
"Schwab is clearly the more likely to survive," said analyst Mark Constant, of Lehman Brothers.
New York-based TD Waterhouse, the third-largest U.S. online broker, is owned by the Toronto Dominion Bank which probably won't let it go, analysts said, making TD Waterhouse the least likely to sell.
From Nasdaq to Big Board
Of the big four, only E*Trade is not cash flow positive. But the company's strategy is to diversify and position itself more as a financial services company.
E*Trade, the second biggest U.S. discount broker, has been on the acquisition trail, buying rival Web Street Securities in May, PrivateAccounts.com last year and adding TeleBanc in 1999, which allowed it to offer products like mutual funds, certificates of deposit and bill payment.
The company is taking a long term view toward profitability but knows that it's vulnerable. E*Trade recently adopted a poison pill to prevent hostile takeover attempts.
E*Trade is not immediately on the block but may look to sell in a few years, analysts said. "E*Trade has so much cash that it is not facing financial pressure to sell," Wasserstrom said.
Small brokers as targets
With the big four out of the running, most analysts expect consolidation to continue for the smaller Web brokers. These include Siebert Financial Corp., which through subsidiary Muriel Siebert & Co. offers retail and discount brokerage services. Mickie Siebert, who owns about 88 percent of Siebert (SIEBERT: Research, Estimates), is the first woman member of the New York Stock Exchange.
A.B. Watley Group Inc., which offers online trading, also received a nod. New York-based AB Watley (ABWG: up $0.05 to $7.05, Research, Estimates) is trying to move away from being just a broker and provides the technology which powers E*Trade's active trader product.
Los Angeles-based JB Oxford Holdings Inc. may also get bought out, analysts said. JB Oxford (JBOH: up $0.01 to $1.52, Research, Estimates) is a discount brokerage as well as a provider of financial services, such as annuities and mutual funds.
Siebert, A.B. Watley and JB Oxford were each unavailable for comment. 
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Muriel Siebert & Co.
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