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.
But the dynamics of the market may prove the ultimate arbiter. Both firms trail Fidelity and Schwab in online trading, and Schwab has been aggressively taking market share from both Ameritrade and E*Trade after having repriced its trading commissions and installing founder Charles Schwab back in the CEO's seat. Moreover, Schwab derives 80 percent of its revenue from business other than online trading. Fidelity is so big and so diversified, meanwhile, that it will probably prosper no matter what happens. That leaves the online brokers with the need to come up with a new business model, while also spreading their costs over a wider customer base.
"As of now, Ameritrade is predominantly a transaction-based business model," says IRG's Fischer. "They haven't yet made inroads in the asset management area. Long-term investors want more product offerings; they want more hand-holding."
Synergy. Richard Repetto, a principal with investment bankers Sandler O'Neill & Partners, says a combined company could be worth $14 billion in market value and pegs the amount of synergies from the possible merger at $562 million. While adding that he did not think a deal was imminent, Repetto said the offer "has the potential to shorten what we thought would be a longer timetable for Ameritrade's acquisition-merger."
For Moglia, a deal at a nice premium to Ameritrade's stock would represent a career capstone. An industry veteran, he ran Merrill's private client business and also oversaw its insurance and 401(k) operations. He spent 16 years coaching football and is the author of The Key to Winning Football: The Perimeter Attack Offense. Earlier this year, he wrote Coach Yourself to Success, Winning the Investment Game, which likens individual investing to the game of football. "The whole theme behind the book was to take responsibility. People spend more time preparing for their vacation than they do planning their finances."
The book is laced with simple ideas a novice investor can follow, including how to measure one's tolerance for risk, asset allocation strategies, and tips on the need to rebalance portfolios on a regular basis. Moglia places special emphasis on the need for diversification. "If you take away only one bit of information from this book, let it be this: The mix is more important than the picks," he writes.
Moglia also argues for using ETFs, which happens to coincide with Ameritrade's current strategy. Whether the former coach will be around at Ameritrade to see his game plan through--or even whether Ameritrade will remain independent--will have to await the next chapter.
E*Trade / Ameritrade
Although Ameritrade bests E*Trade slightly in daily trading volumes, E*Trade's bank helps boost its revenues.
E*Trade Ameritrade
Founded 1982 1975
Headquarters New York City Omaha
2004 revenues $1.53 bil. $880 mil.
Average daily trades Jan.-Mar. 135,000 167,000
Stock price (as of 5/11/05) $12.38 $13.76
Year-to-date return -17.2 pct. -3.2 pct.
Source: Company, analyst reports
This story appears in the May 23, 2005 print edition of U.S. News & World Report.