That'll create yet another sweet window of opportunity for me. That corporate monster combination stuff rarely goes well, though I'll give AMTD credit on the Datek deal. They did that well.
By RIVA D. ATLAS Published: May 10, 2005 Online brokerage firms have cut and cut their trading commissions over the last year. But with the stock market still in a slump, the firms may have no other option left but to combine.
That need to cut costs out of what has become a business with little growth has put three of the biggest names in the business into play. On Friday, E*Trade Financial proposed a merger with Ameritrade Holding valued at more than $5.5 billion, executives involved in the talks said. Ameritrade, meanwhile, has been in talks to buy TD Waterhouse, a division of the Canadian banking giant Toronto-Dominion.
"We've had choppy market conditions for five years now," said Kenneth Worthington, an analyst with CIBC World Markets. "The only way left for these companies to grow is to buy each other."
Word of the merger talks lifted the stock prices of online brokers yesterday after months of weak performance.
The negotiations are happening now because the brokers realize that trading revenues will not revive anytime soon and that they need to take other steps to increase profits, analysts said.
Low trading volume has also been one of the driving forces in the recent consolidation among exchanges. The New York Stock Exchange is planning to acquire the electronic trading system Archipelago Holdings, while Nasdaq is combining with Instinet.
Brokers cut commissions several times last year, to as low as $8.95 a trade in some cases. But despite those cuts, the number of United States households trading online increased modestly to 6.3 million in 2004, up 5 percent from a year earlier, according to Forrester Research, which tracks the impact of changes in technology on business. That figure is still a far cry from a peak of 7.4 million households trading online in 2000.
"Last year was, at best, a wash" for online brokers in terms of trading revenue, said Bill Doyle, an analyst at Forrester Research. "Trading has become a loss leader," he said, as brokers look to sell other products to their customers.
In recent years, Ameritrade in particular has lost share to aggressive and better-capitalized competitors like Fidelity and Charles Schwab, said Michael Hecht, an analyst with Banc of America Securities.
Ameritrade's share of online trading by individual investors has fallen to 20.8 percent as of the first quarter, he estimates, down from 27.9 percent four years ago.
E*Trade's takeover bid reflects the company's belief that discount brokerage customers are good prospects for the sale of other financial services products.
E*Trade started offering banking products like home mortgages and credit cards after it acquired Telebanc five years ago.
"The strategy is paying off," Mr. Doyle said in a report yesterday. As of the first quarter, E*Trade derived nearly three-quarters of its revenue from businesses other than trading, he said.
Since Ameritrade does not offer these products, its customers would be good prospects for cross-selling, analysts said. As of March 31, Ameritrade customers had $12.7 billion in cash, said Richard Repetto, an analyst with Sandler O'Neill, in a report yesterday. Some of that money could be converted into bank deposits, he said.
Mr. Repetto estimates that the combined companies could see $562 million in cost savings and increased revenues in 2006.
Representatives for Ameritrade and E*Trade declined to comment yesterday.
Investors were clearly heartened by the prospect of a wave of consolidation. Shares of Ameritrade rose more than 18 percent yesterday, to $13.42, while E*Trade's stock increased 5.8 percent, to $12.62.
Shares of competitor Charles Schwab also rose, to $10.74, up 41 cents. Some analysts said Schwab would benefit from its competitors being distracted by merger talks.
Still, other analysts struck a cautionary tone yesterday about the industry's prospects, even if the discussions do yield mergers.
A rise in interest rates could dampen enthusiasm for the banking products E*Trade is selling. And, if the stock market remains weak, some customers may prefer to do business with larger financial services firms, where they can obtain more advice and have access to a broader array of products.
"It is likely that customers will leave E*Trade and Ameritrade as their needs increase," said Richard Bove, an analyst with Punk Ziegel & Company. "Full service brokers will skim the cream off the top" of the discount firms, he said.
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