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E*-Ameritrade? Why Bother

Posted By Barry Ritholtz On May 9, 2005 @ 9:48 am In Finance | Comments Disabled

Merging these two firms together makes very little sense to me. Why? They are 2 players in a commodity business, engaged in a 5-way price cutting war.

Putting these two firms together might eliminate some costs, but hardly enough to justify a merger – and not even of equals. How much expense is there running these firms (although we do know they both spend a boatload on advertising). Ameritrade [1] is primarily an online trading house, doing less than a Billion per year in revenues. E*Trade [2] has more than $2 billion in revs, and is far more diversified into banking, lending and other financial products than Ameritrade.

That there are a few other issues with merging: "Anti-accounts" and overlap. Anecdotally, we know of plenty of "Anti-accounts" — those on-line traders who for whatever reason, don’t like one or the other of these firms; that’s why they are with the other one. After a merger, they head to Schwab, T.D. Waterhouse, Brown or Scott-Trade.

Then there are those people, who for accounting or other reasons, need to maintain accounts at different firms. I suspect that in the event of a merger, these same client dual accounts would transfer one away.

So a merger may generate quite a bit of churn.

But the real issue here is that this is a commodity business. The firm that figures out a non-price cutting formula to differentiate itself will be the long-term winner. Merely acquiring another firm, with all the distractions and problems of integrating the two, may not prove to yield particularly strong results.

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UPDATE:  May 9, 2005  2:35pm

To respond to all the emailers who think there are economies of scale: 

If E*Trade (ET) spends $86 million a year on advertising (according to its most recent 10-K) and Ameritrade (AMTD) somewhat less, are you figuring a $20 million-per-year saving times five years?

Postmerger, they will be that much bigger of a firm — that many more servers, lines, etc. — I think they would ratchet up the advertising budget somewhat, albeit a smaller percentage of revenue than at present (5% of $2B vs. 4% of $3B). That’s more than E*trade spends now, but less than the two entities spend now combined.

Of course, that’s before we even get to the question of how much it will cost to integrate these two completely different trading systems onto one platform.

I think 1 + 1 = 1.5 at best.

Meanwhile, I doubt Charlie Schwab (SCH) is gonna sit on his hands — he (and Scottrade and TD. Waterhouse and Brown, et al) all crank up their ads, forcing Ameri-E*trade to do the same.

Of course, if E*Trade can get Ameritrade to do an all-stock deal — essentially, a free paper transaction and acquisition of its client base — than it’s in ET’s interest. But then, why would Ameritrade’s shareholders agree to that?

They should be hitting this bid right here.


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URL to article: http://www.ritholtz.com/blog/2005/05/e-ameritrade-why-bother/

URLs in this post:

[1] Ameritrade: http://www.ameritrade.com/index1.html

[2] E*Trade: https://us.etrade.com/e/t/home?SC=LBH4249

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