Combine and conquer
A rival online broker woos Ameritrade. Teaming up might be a wise thing
When Joe Moglia arrived as CEO at Ameritrade in 2001, he found the online broker suffering amid the bear market and collapse of the day-trading phenomenon. But Moglia, a former top Merrill Lynch executive and Dartmouth College defensive football coordinator, knew a thing or two about tough challenges. After all, during his three-year tenure, Dartmouth won the Ivy League title twice.
Moglia went to work, trimming overhead, cutting other costs, and launching a takeover binge in which Ameritrade gobbled up rivals Datek and National Discount Brokers. Even though day trading never came back, Ameritrade posted higher revenues in 2003 and 2004 than in the glory days of the online stock trading boom.
Targeted. Now Moglia may be wondering if he was too successful. Just a couple of months after agreeing to a six-month contract extension, Moglia last week found his firm the target of an unsolicited $5.5 billion acquisition bid from E*Trade, another of the online brokers whose name was synonymous with the Internet bubble. Earlier rumors of the deal kick-started Ameritrade's stock, which bounced 20 percent after languishing much of the year. Ameritrade said it was not for sale. At the same time, rumors are rife within the industry that Ameritrade has also been talking with TD Waterhouse about a possible deal.
There's no question the industry is ripe for consolidation, as Moglia has already proved. Most of the firms have highly sophisticated technology that can easily handle more business. Average trading commissions have been falling amid a price war, as have daily trading volumes. To survive, each firm is trying a new strategy. E*Trade is pinning its hopes--so far quite successfully--on expanding its palette of services, adding banking and such consumer-oriented products as mortgages to its offerings.
"E*Trade got in at a very good time," says Matthew Fischer, an analyst with IRG Research who follows Ameritrade. "The mortgage business, obviously, is going gangbusters. A substantial portion of their revenue is coming from the bank."
Ameritrade, meanwhile, is attempting to position itself as a discount alternative to mutual fund giants Vanguard and Fidelity, with customized portfolios of exchange-traded funds (ETFs). In doing so, it wants to shift its revenue focus away from transaction-related activities such as trading toward fee-based services like asset management.
"Day trading was a pretty lucrative business but a very niche market," Moglia said in an interview before the E*Trade advance became public. "That market is maybe 5 percent of what it once was."
While investors and Wall Street analysts voiced their desire for a deal to be done, the route to a combination could be rocky and revolve as much around management issues as business fundamentals. Joe Ricketts founded Ameritrade in 1975 as First Omaha Securities, and a son, Peter, is currently vice chairman. All told, the family controls about 30 percent of the stock. E*Trade, meanwhile, is headed by CEO Mitch Caplan, who has said in prior interviews that his firm's management team is up to the task of running a bigger company should consolidation continue in the industry.
advertisement
