Buy E*Trade? What's In It For TD Ameritrade?

Forbes

As one of the a most recognized online trading companies struggles a rival may be stepping in to save the day and up its market share at the same time.

E*Trade's wounds from the financial crisis never completely healed and now just a few years after it almost filed for bankruptcy it's being forced, by shareholders like hedge fund giant Citadel, to consider "strategic alternatives." One of those alternatives is a sale, and right now one of its likely suitors is its Omaha, NE rival TD Ameritrade.

There have been reports that the third largest online brokerage firm is considering picking up its troubled peer but TD would not confirm those talks. A company spokesperson said that tomorrow's board meeting is a regularly scheduled meeting that's held once a quarter soon after earnings are reported. "I can't say the Board is going to address specifically any of those talks but I can say that it does discuss the strategy of the company during these meetings," the spokesperson said over the phone.

For TD, an outright acquisition of E*Trade would help it edge a bit closer in the online brokerage industry's race for assets. A deal with E*Trade would give TD  another 6% market share bringing its total market share to 17% in the online brokerage world, that's according to a report due out tomorrow from Boston-based Aite Group. A deal wouldn't push it past #2 Charles Schwab which had 27% market share at the end of 2010, and no where close to Fidelity which has a strong 41% share of the industry's $2.5 trillion in assets, according to Alois Pirker, a research director at Aite Group, specializing in trends in the wealth management market.

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In the report due out tomorrow Aite Group notes that "from the end of 2008 until the end 2010 TD and E*Trade were able to grow their client assets at the incredible rate of almost 75%. Meanwhile the two larger online brokerage platforms Fidelity and Charles Schwab grew somewhat more slowly but still at landmark rates of 51% and 42% respectively during the same period."

"A deal would certainly be a market share improvement for TD as Schwab and Fidelity are dominating that segment. It would give TD more scale and a better shot at competing more closely with Schwab," Pirker says.

But a deal would have to be sweet enough for TD because  E*Trade's mortgage portfolio is still considered a risk. The good news is that this not the first time TD has sized up E*Trade. Back in 2009 TD Ameritrade CEO Fred Tomczyk said the company would consider a deal for E-Trad that it would be a big risk considering E*Trade's mortgage-ridden balance sheet

In January 2010, Ed Clark CEO of Toronto-Dominion Bank and TD's biggest shareholder speculated on the purchase of E*Trade saying “I think everyone recognizes that E*Trade has to play out and we have to see what happens to its balance sheet,” and that the true value of the E8Trade was to tough to place given the uncertainty over the housing market.

E*Trade investors are hoping this time TD's talks will amount to something more concrete. That's come especially true for its largest shareholder Citadel which owns about 9.8 percent of E-Trade's common shares. In 2007, Citadel invested $2.5 billion in the online brokerage which was suffering on losses from mortgage investments and resulted in painful net outflows.

In letter last week to to E*Trade CEO Steven Freiberg Citadel said that mismanagement by E*Trade's board and executives caused the company to lose money every year since 2006, destroying shareholder value and squandering growth opportunities.

"Having endured nearly four years of value destruction and lost opportunity, we believe it is time for change. E-Trade shareholders have waited long enough," Citadel said in the letter. The letter pointed out that E*Trade's stock has declined by 94 percent in the past five years, destroying more than $9 billion in shareholder value.

(Read E*Trade’s Q2 In Line After Citadel Calls For Sale, Board Shakeup)

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