$100M Acquisition Vaults E*Trade to Top Spot

E*Trade (NYSE: ET) said Wednesday that it will pay US$100 million in stock for privately held Tradescape. The move will nearly double the number of daily stock trades on E*Trade's network, making it the industry leader in that category.

The deal contains incentives that could bring its total value to $280 million if Tradescape hits "aggressive" performance targets over the next two years.

In a separate announcement, E*Trade said it will pay A.B. Whatley $5 million to acquire some of its stock-trading technology.

Short-Term Payoff

According to E*Trade, the acquisitions will be "slightly accretive" to 2002 earnings but will not affect the company's guidance for the year. The deals may add as much as 10 percent to 2003 earnings-per-share, the Menlo Park, California-based company added.

The moves came just days after E*Trade competitor Ameritrade emerged as the winner of a heated private auction to acquire Datek Online. E*Trade reportedly had bid on the company as well.

Ameritrade said the Datek deal, valued at nearly $1.3 billion, would make it the busiest online brokerage, with 164,000 trades per day on the combined platform.

But E*Trade said it will handle an average of 200,000 stock trades per day once it takes over the bulk of Tradescape, which caters to day traders and has a division, Momentum Securities, that provides trading services to professional brokers. The companies expect the deal will close by the third quarter.

One-Up War?

GartnerG2 vice president and research director David Furlonger told the E-Commerce Times that the spate of mergers this week continues a long-standing trend in the online brokerage world.

Ameritrade previously bought National Discount Brokers, and the Bank of Montreal bought CSFB Direct.

In an added twist, it now appears as though online brokerage firms are vying to one-up each other.

"It's almost as if we're entering into some kind of ego-driven bidding war," Furlonger said. "E*Trade had forsaken that model by moving away from being a pure online trading house. Now, they're saying they're back on top with number of accounts, and next week it will be Charles Schwab (Nasdaq: SCHW) saying they've got the most."

Underlying Weakness

Furlonger noted that nothing in either the Ameritrade or E*Trade deals alleviates his concern that transaction fees will continue to fall for online brokers, making the transaction fee-based business model "fundamentally unsound and unlikely ever to result in long-term profitability." He predicted more consolidation will occur.

"E*Trade is more protected than others because of its diversification, but it seems like these companies are banking on a big return to day-trading activity in the stock market, and there's just no guarantee that's going to happen," he added.

Small Bounce

Investors greeted news of the deal with a shrug. In early trading Thursday, E*Trade shares were down just 2 cents from Wednesday’s closing price to $9.03.

While E*Trade has not acknowledged that it was among those bidding for Datek, company CEO Christos M. Cotsakos said E*Trade's moves follow a long-held acquisition strategy based on "finding those opportunities which are priced right for the marketplace and that add significant value."

"We have the currency and resources for selective, disciplined acquisitions, allowing us to look at all opportunities but select only the best," Cotsakos said.

"Over a period of months, we have explored numerous alternatives and firmly concluded that the acquisition of Tradescape is the ideal choice," added Jarrett Lilien, chief brokerage officer and managing director of E*Trade.