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E*Trade in Play, Ameritrade May Catch

E*Trade article update to include Ameritrade meeting, response by E*Trade to Citadel letter.

NEW YORK ( TheStreet) -- TD Ameritrade (AMTD - Get Report) will hold a meeting Tuesday to discuss a possible acquisition of E*Trade (ETFC - Get Report), The Wall Street Journal reported Monday.

E*Trade (ET)shares have surged more than 20% since Wednesday, when Citdatel, a giant Chicago-based hedge fund and E*Trade's top shareholder, wrote a letter to E*Trade's board of directors slamming its performance and urging a special shareholder meeting to vote on "strategic alternatives" including a possible sale of the company.

TD Ameritrade is long considered a potential acquirer of E*Trade.

"We have a long history of M&A, having made 10 acquisitions in 10 years," said TD Ameritrade spokeswoman Kim Hillyer. She confirmed that TD Ameritrade CEO Fred Tomczyk said at a conference in late 2009 that the company would consider a deal for E*Trade if conditions were right, however she added "we would never comment on a specific deal."

The sharply-worded letter from Citadel chief legal officer Adam Cooper also urges the removal of two board members, Michael Parks and Donna Weaver, and the removal of "staggered Board provisions to give shareholders a meaningful voice in the company's future.

"Since November of 2007, the board has continually failed to act in the best interest of E*Trade shareholders. Having endured nearly four years of value destruction and lost opportunity, we believe it is time for change," read the letter from Citadel, a giant Chicago-based hedge fund. Citadel has been E*Trade's largest shareholder since 2007 when it invested $2.5 billion, "saving E*Trade from near certain failure," the letter states.

Though best known as an online broker, E*Trade got into trouble by extending home equity loans and investing in mortgage-backed securities ahead of the crisis. Despite new management and efforts to focus on its online brokerage business, E*Trade shares closed on Tuesday at roughly the same level they were at in Nov. 2008.

E*Trade's board responded to the Citadel letter with a letter of its own, stating the board "believes that it has already addressed the substance of Citadel's proposals and that it is not in the best interests of shareholders to call a special meeting at this time."

The E*Trade letter states that it already retained JP Morgan Chase (JPM) in the fourth quarter of 2010 to examine the company's options, including a sale, but that the bank's review concluded a sale was not in shareholders' best interests. Still, responding to Citadel's letter, E*Trade has now hired Morgan Stanley (MS) to take another look at whether a sale makes sense for shareholders.

The E*Trade letter also states Citadel "has, in the last 18 months, significantly reduced its investment in E*Trade through the sale of billions of dollars of debt and equity securities at a substantial profit. In the past five months alone, Citadel has sold approximately 51 million shares of E*Trade for proceeds of approximately $831 million."

E*Trade further argues that "Citadel's proposal to call a meeting to remove two highly qualified independent Directors is inappropriate, and contrary to Delaware law."

Citadel disputes this claim in a second letter and reiterates its call for a special shareholder meeting.

A note from Sandler O'Neill analyst Rich Repetto appears to side with Citadel (for example, it states that Citadel's second letter "refutes" the claim by E*Trade's board that the Citadel request is contrary to Delaware law) and states that the E*Trade letter "raises questions," such as why JPMorgan was hired, why it concluded a sale was not in shareholders' interest, and whether JPMorgan's review included talks with possible acquirers.

-- Written by Dan Freed in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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