3 Reasons E*Trade Will Be Bought Out

E*Trade (Nasdaq: ETFC  ) finally has its new interim CEO, but he's only going to fuel rumors of a buyout in 2010. The discount broker announced that Robert Druskin will take over for Don Layton.

Ever since Layton announced that he would retire by year's end, it's been fun to speculate about the direction that the company would take with its next helmsman. Would it land a flashy outsider? Would it raid the executive ranks of rivals Charles Schwab (Nasdaq: SCHW  ) or TD AMERITRADE (Nasdaq: AMTD  ) ?

As the clock ticked down on 2009, other questions arose:

  • Would Layton have to stay on beyond his exit date?
  • Was E*Trade having a problem attracting a successor, or was it just picky?
  • Would it have to settle for a lesser CEO to avoid the embarrassment of missing Layton's retirement deadline?

Druskin isn't chopped liver. He's a former Citigroup (NYSE: C  ) COO. However, he's also an insider. Druskin has been an E*Trade board member for nearly two years. The fact that he's just the interim CEO -- for now, anyway -- is only going to heighten the buyout buzz.

Let's go over the three reasons the rumors are credible.

First of all, settling for an insider -- Druskin's pedigree papers aside -- is a sign that E*Trade isn't trying to seek out an outsider (because it sees an inevitable sale) or that potential candidates are being scared off (because they see an inevitable sale).

The second reason is that E*Trade made sure the announcement was delivered before Layton's retirement. The broker's credibility -- if not its share price -- would have taken a hit if leadership were in limbo.

The third and final reason is the "interim" tag. Temporary CEOs often become permanent ones, but E*Trade is essentially admitting that it's still looking, and that's one way to pinpoint a potential suitor.

E*Trade is a better company than its share price suggests. The industry is in a near-term funk, but E*Trade is still running a successful discount brokerage, despite the online banking demons.

Someone is going to step up and make E*Trade an offer it can't refuse next year -- and its interim CEO will nod along.

What's that? You're still unsure about whether you should get a new broker? Get thee to our Discount Broker Center to learn more and compare some sponsored commission schedules.

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Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990, but he owns no shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Foolhas a disclosure policy.


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  • Report this Comment On December 22, 2009, at 1:53 PM, PrashantJain wrote:

    Fools like to speculate and they have been doing it for a year now....but this deal has not yet happened...so what makes the things so different all of a sudden...Don't get fooled...this deal is never going to happen....PERIOD.

  • Report this Comment On December 22, 2009, at 2:09 PM, Mliaom wrote:

    Rick, I don't like your ripping ATVI and video game sector every chance you get but I do agree with you on ETFC. Even though I don't like your call on video game sector but you have been right until NOW!

    may be you will be right about ETFC also..you can't beat em join em.

    disc: long ETFC

  • Report this Comment On December 22, 2009, at 2:22 PM, fjjcpa wrote:

    I think E-Trade will be bought out by Google and the new E-Trade will be G-Trade. It makes alot of sense for both companies. It gives Google an Online Trading platform with a huge customer base and it give E-Trade a partner with a technogical base and huge cash reserves. If this deal does not come together, watch Microsoft move in on E-Trade to grow its Finance search capability.

  • Report this Comment On December 22, 2009, at 2:51 PM, PrashantJain wrote:

    i can only laugh at the comments of fjjcpa

  • Report this Comment On December 22, 2009, at 2:55 PM, PrashantJain wrote:

    let me tell u why the share price has gone up in last week or so...it bcos the big manipulators want to make money on january call options...that is precisely the reason...watch it come down after jan 2nd

  • Report this Comment On December 22, 2009, at 4:55 PM, fjjcpa wrote:

    PrashantJain - I give E-Trade a target price of at least $4 per share. E-Trade has cleared alot of its delinquent mortgage portfollio and has reduced its EPS loss to less than 3 cents. The company does spend alot on advertising but at the same time has grown its business base, TD Ameritrade has not ruled out a take-over but there would be greater value added for Google to do this deal. In the SNS (Social Networking Site) business, you want a large customer base to draw advertising, That was why Google went after Youtube, I can't guarantee it will happen but I do think it would make for a very strong business model. I'm sure the other Online trading firms would be horrified if this deal were to come together because, there is no doubt they would lose alot of accounts. Google's management is some of the best in the business, They have a great sense of marketing and at the rate they are going, they will own the internet, They know that the way to get their is through acquisitions. I know alot of people who have moved over to Google Chrome. They own the search market with BAIDU a threat given its low overhead cost. You grow this internation market with smart acquisitions. The first thing they would do after an acquisition is reduce overhead and move alot of the advertising over to their business platforms. This alone would move E-Trade into positive Earnings Per Share. I think the reason a take over is talked about is because it makes sense. I think the option activity and volume reflects alot of upside interest in this stock.

  • Report this Comment On December 22, 2009, at 5:44 PM, raptorx25 wrote:

    Great idea on the G-Trade. That would indeed solve ETFCs debt problem and greatly benefit both companies. How would that affect the stock price, I wonder?

  • Report this Comment On December 22, 2009, at 6:48 PM, plange01 wrote:

    etrade is a stock to own and will be bought out in 2010.also you can throw sprint in the same pot another good stock that will be bought out....

  • Report this Comment On December 22, 2009, at 7:17 PM, fjjcpa wrote:

    Thanks raptorx25 - I think it would drive the price of both stocks up, considerably. Why? Well - Google which is trading at $600 per share could easliy assume the debt of E-Trade and have additional revenues from day one. They would lock down a best of breed trading application which would also open the door to a financial services division. The new G-Trade application would of course reside wireless devices like cell phones etc. The thinking is that more and more people are getting into SNS and when you merge that with investing community to have a recipe for revenue growth. I'm not sure how high the stocks would go but I think it could go up significantly.

  • Report this Comment On December 22, 2009, at 7:31 PM, galtline wrote:

    I'm still going with my original prediction (quite awhile ago now) - ETrade will be sold to GS.

  • Report this Comment On December 22, 2009, at 7:37 PM, NorseWarrior wrote:

    I'm sorry. I'm a bit slow on the uptake here. Hiring Druskin is a GOOD move? I don't have have his full resume' in front of me, but it might shed some light on why this make sense. If I had ANYTHING to do with the train wreck that Citigroup has become, I'd be looking for beachfront property in some place that doesn't have an extradition treaty with the US. Looks like the market was underwhelmed, too. a $.01 uptake in the price today? Can we contain our excitement here over this announcement?

    Seriously--please educate me as to why this guy is the right one to provide competent leadership to a troubled organization?

  • Report this Comment On December 22, 2009, at 7:46 PM, amosoldi wrote:

    E*Trade is going to a bank that wants brokerage and can handle the mortgage portfolio.

    Wells Fargo

    Chase

    or

    B of A

  • Report this Comment On December 23, 2009, at 12:25 AM, Danley2011 wrote:

    B of A has ML... No reason for them to pick up etrade, even if they could afford it and get it past regulators...

    Chase and WFC are still digesting fire-sale govt-backed aquisitions...

    GS doesn't need e-trade at the moment and Google wants to become more than an Ads sale company...

    My vote is GOOG

  • Report this Comment On December 23, 2009, at 8:20 AM, galtline wrote:

    Danley2011,

    Sure, GS doesn't need E-Trade...but do they want them? GS stated awhile back that they were looking to get into online banking...just a strange news blip that disappeared quickly.

    Guess we'll see.

  • Report this Comment On December 23, 2009, at 8:27 AM, raptorx25 wrote:

    Yes, I think that Google would be the ideal suitor, though their totalitarian ambitions are beginning to worry me. As an ETFC shareholder, however, the match could cause the value to skyrocket, so I have mixed feelings about it.

  • Report this Comment On December 23, 2009, at 10:49 AM, Danley2011 wrote:

    galtline,

    I guess I missed that news blip, which isn't surprising since it doesn't promise "the end of mankind", "the end of our financial system", or "the beginning of the United States of Eurasia" that flood our news channels now-a-days.

    Now that GS is a bank holding company, I guess that would open them up to acquiring an entity with deposits. Personally speaking, I think mixing investment banks with personal deposits is a recipe for disaster so I adamantly hope GS isn't the suitor. However, if you're a GS shareholder, acquiring a bank with >$5b in deposits would give you easy access to capital for your various trading whims. This could help solve some of the issue of "what will GS do when interest rates go up and FICC trading becomes not 'as' profitable".

    All that said, I'm still hoping for GOOG if ETFC does get acquired. It would be a strange entrance for GOOG to get into financials but if they could pull it off, they could easily put to work their vast sum of spare cash.

    The next 6-12 months should be fun! :)

    disclosure: I'm not a GOOG, GS, or ETFC shareholder.

  • Report this Comment On December 23, 2009, at 11:07 AM, Fool wrote:

    This stock is worth $4 - $5 in 2010. Buyout is coming next year.

  • Report this Comment On December 23, 2009, at 11:43 AM, galtline wrote:

    Danley2011,

    Well...to be forthcoming, this news blip was AWHILE ago...it came, went, and nothing was ever said again about it.

  • Report this Comment On December 23, 2009, at 5:34 PM, plange01 wrote:

    etrade will either be bought in 2010 or it will be closed.anyone interested in buying it knows that and wont pay much as they can just wait and get their customers for free....

  • Report this Comment On December 23, 2009, at 5:35 PM, fjjcpa wrote:

    A couple more thoughts on this subect. The stock is up 1.69% today and EPS growth has been almost 100% over the past year. Revenues and new accounts continue to grow even in recession. E-Trade never took the TARP money because they realized they didn't need it. If Google users start moving trades over to E-Trade, watch out. Their revenues will sky rocket. Can you imagine the E-Trade babies doing Google searches? I don't think Druskin is just going to want to hold the tiller. His job is to move out and create Stockholder value. How would an aquisiton happen? Google at over $600 per share would probably either use a mix of cash and stock swap which would be a drop in the bucket for them, especially since they would pick up the assets of E-Trade. Let's see what happens but I think the honeymoom is over for Druskin come January. Citadel or T.Rowe will probably lead the charge.

  • Report this Comment On December 23, 2009, at 6:17 PM, greenwave3 wrote:

    Why in the world would Google want to enter the finance and trading markets? They recently expanded their mobile offerings and that segment is more in-line with the company's strengths. Anyone who honestly believes Google is a good suitor for ETFC has no business trading stocks. What's your next smashing idea, McDonald's buying Citigroup? Gimmee a break.

  • Report this Comment On December 23, 2009, at 6:32 PM, PrashantJain wrote:

    I think you guys are just dreamers....it may happen eventually....or may be not....who knows...but I am confident it won't be Google or Goldman...thats for sure....But I still feel that E-trade is a Big scam and all the big investors manipulate its price to make profits and then they are the one who leak all these rumors and do upgrades and downgrades as and when it suits them

  • Report this Comment On December 24, 2009, at 12:31 PM, fjjcpa wrote:

    Good queston Greenwave. There are several reasons. E-Trade has a tremendous amount of exposure to investors who make an ideal audience for Google advertising. Why? because for the most part they have good incomes and therefore trade stocks. Google makes its money through its advertising base. The relationships between SNS and investing are becoming more closely aligned as people become more educated globally. Today - even the high school graduate understand the definition of EPS. Now when people twitter or blog very often its about where to invest etc. Also - keep in mind that this provide Google the opportuniy to diverify into a market where their technology and business model could turn E-Trade into a cash cow. As I mentioned, from day one they could turn a positive EPS by reducing the E-Trade advertising budget. Imagine E-Trade on the Google front end. Imagine E-Trade with access to Google Financial Search capability. Imagine E-Trade with a stong financial partner, Imaginge cross exposure to larger customer bases. Imagine Google with an entry into the online investment and banking business. So - I'm not saying this will happen but try to think like Warren Buffett (out of the box, visionary) Imagine Google with turning E-Trade into a case study for how a company with vision, excellent management and resources took this online banking and trading company to best of breed. As for the McDonalds Citi analogy - I agree that would not make sense.

  • Report this Comment On December 24, 2009, at 12:58 PM, greenwave3 wrote:

    fjjcpa,

    My MCD-Citi analogy was meant to draw parallels to your GOOG-ETFC proposal. Wrong industries. Makes no sense.

  • Report this Comment On December 24, 2009, at 2:23 PM, fjjcpa wrote:

    Greenwave - if they were in the exact same industries, it wouldn't make sense because why buy a market share you already dominate. What your looking for is synergy and diveristy that adds value to both companies. When Packard bought Studebaker they were both in the same industry and this didn't help either company. Now - had either Goodyear or US Steel bought Packard, that would have been interesting because it would have contibuted sales to the bottom line and maybe a great car that would still be around today. The key is to expand up and down the product line. If Google were to buy McDonald's now that would not make sense. Google - Amazon yes. Google - E-Trade Yes. Google - Quest? Maybe - it take the back end (processing) to the front end (website) back to the consumer (fiber optics and bandwidth) at a lower cost to the consumer.

  • Report this Comment On December 25, 2009, at 3:42 PM, greenwave3 wrote:

    fjjcpa,

    I agree that the best corporate matchups are ones that take advantage of both companies' competitive strengths. However, Google is not a finance company and rightfully so, I don't think it is in their business plan to become one. As we have all found out in the last year, finance can be a risky business. Why would Google, with their high margins, revert to a risky, lower-margin business? I realize you are really passionate about this point, but its just not realistic. Maybe it's some kind of wet dream for ETFC shareholders, but it's just not going to happen.

    greenwave

  • Report this Comment On December 26, 2009, at 11:44 AM, megastockmaster wrote:

    I would be very surprised if GOOG is eyeing ETFC.

    I own neither stock.

    However, as an ETFC brokerage customer I'm salivating at the following thought: GOOG buys ETFC and eliminates the trading fees.

    Why? Because the money they would make in advertising via Etrade (they know the stocks you are investing in...) might more than make up for it.

    Yes: people who use google finance would have buttons permitting them to execute trades from their finance search maybe and also cool trading tools to help traders and investors perform interesting calculations.

    I think it would be paradise.

    But Google already has so many irons in the fire, and I just don't see this as their sort of deal.

    I could eventually see them developing their own platform, however.

  • Report this Comment On December 27, 2009, at 12:13 PM, fjjcpa wrote:

    Mega - really good points. Even if Google reduced the E-Trade commissions by let's say 20% the offset would be an increase in advertising revenues and a larger customer base. If it makes sense to us, it will likely make sense to the management of both companies.

  • Report this Comment On January 01, 2010, at 7:57 AM, Chuckstick wrote:

    What would happen to ETFC brokerage customer accounts if the company is bought out?

    Should customers consider another broker?

  • Report this Comment On January 07, 2010, at 7:59 PM, diggerjj wrote:

    this is what money is for

    Have fun and buy lots of ETFC

    Is this going to be great or what :)

    more chatter from another sourse :

    A less obvious but still visible reason for the change is to drive E*Trade into Schwab's arms. E*Trade's market cap is just $3.3 billion, while Schwab enjoys a cap of over $22 billion. Schwab could offer as much as $8 billion for E*Trade, a premium of more than 4x E*Trade's current share price, and still make out like a Somali pirate.

  • Report this Comment On January 13, 2010, at 1:45 PM, njdm wrote:

    Would e-trade still sell under the same stock symbol if GOOG took it over?

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