Ameritrade Could Be Vulnerable in Online Musical Chairs

For online brokerages afflicted by the twin plague of falling cash reserves and declining stock prices, the emerging era of consolidation could be a dangerous one.

Analysts say E*Trade(ET) and Schwab's(SCH) efforts to diversify their revenue sources over the past 18 months could be construed, among other things, as defensive measures to ward off suitors. One company seen as still vulnerable is Ameritrade(AMTD), which hasn't been able to move into new product lines as fast as some of its peers.

"Ameritrade could use added accounts, but their currency and cash is going to hinder their potential to buy anything," said Richard Repetto, an analyst at Putnam Lovell Securities. "They're the least diversified, they don't have a lot of different moving parts like an E*Trade," he said. As of the end of its fiscal first quarter on Dec. 31, 2001, Ameritrade had $41.7 million in cash and cash equivalents.

Bite-Sized

At $5.68 a share, Ameritrade sports a market cap of about $1.2 billion, compared with $19.7 billion for Schwab and $3 billion for E*Trade. Ameritrade and E*Trade are usually said to be worth about $700-$800 per account, which means the bigger the safer when it comes to autonomy. That might explain E*Trade's reported interest in buying Datek and its recent decision to revisit expansion in the U.K.

"Schwab is quite substantial," says Rob Sterling, Jupiter Media Metrix analyst. "If it decides to be acquired it will be out of desperation. E*Trade -- I don't think they want to be acquired," he says.

Ameritrade's ownership structure is probably the biggest obstacle to an acquisition. Company founder Joe Ricketts still owns over 60%, and "he probably sees much higher value than what is there now," says Repetto.

But some potential suitors have deep pockets. An analyst who asked not to be named said Bank of America(BAC) might be shopping around for an online brokerage to keep up with rival Wells Fargo(WFC).

"Bank of America is aware that it's been less aggressive and may look to pick somebody up on the cheap," the analyst said. Another analyst who also spoke off the record said insurance companies, many of which don't yet offer an array of financial services, could be potential suitors.

But with shares of Internet brokerages trending lower for more than a year, buyers may hold out. "I'm surprised there hasn't been more of a shopping spree, but there's still time to let these brokerage firms sink a little deeper," said one analyst.

At the Mall

Purchasing Datek would cap a period in which E*Trade used acquisitions to bulk up its assets and services ahead of its E*Trade Financial rebranding last month. Mainly through acquisitions and partnerships, the company now sells mortgages and other loans and offers portfolio advice. The core online business has also expanded: the company bought Web Street Securities last year, adding 34,000 accounts, and picked up the retail brokerage of Wit Capital the year before. Analysts speculated the company still has about $400 million to do acquisitions.

Probably the highest-profile example of consolidation so far has been the sale of CSFBDirect, which Credit Suisse carved from the online operations of Donaldson Lufkin & Jenrette after acquiring the U.S. investment bank in 2000. U.S. banks and brokerages, including E*Trade, Ameritrade, American Express and FleetBoston's Quick & Reilly, were considered potential suitors for CSFBDirect, but the company was ultimately sold to Bank of Montreal for about $520 million in November.

Other assets have migrated north. Bank of Nova Scotia jumped on Schwab's offer to sell its Canadian brokerage operations last month for an estimated $25 million. And Toronto-Dominion Bank, which owns TD Waterhouse, is shelling out up to $430 million to buy the equity option market-making operations of two Chicago-based firms, Stafford and Letco.

Elsewhere, JB Oxford recently agreed to acquire Stockwalk.com after picking up Bull & Bear and eCapitalist in 2001.

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