E*Trade Financial Corp., the fourth- largest U.S. online brokerage by client assets, dropped the most in the Standard & Poor’s 500 Index today after the board rejected putting the company up for sale.
The brokerage hired Morgan Stanley in July to explore a sale and then replaced the bank with Goldman Sachs Group Inc. E*Trade, based in New York, initiated the review following a request by Citadel LLC, its biggest shareholder, to address “catastrophic losses” that have driven the shares down 96 percent since 2007. Citadel injected $2.55 billion in cash into E*Trade that year to help the company survive mortgage losses.
“A strong desire to sell was never present at E*Trade and if any offers were in fact on the table, they were not compelling enough to change that fact,” Patrick O’Shaughnessy, a Chicago-based analyst at Raymond James & Associates Inc., said in a report today. “In our view, the pool of potential buyers is and always has been relatively small.”
The board concluded that “the continued execution of the company’s business plan is currently the best alternative for increasing stockholder value,” E*Trade said in a statement yesterday.
Devon Spurgeon, a spokeswoman for Citadel, declined to comment on E*Trade’s announcement. Ken Griffin’s Chicago-based hedge fund asked E*Trade on July 20 to arrange a meeting for shareholders to vote on items such as hiring an investment bank and removing two directors. E*Trade, which fired Morgan Stanley in August after Citadel challenged the hiring process, rejected hosting a meeting, and instead began the strategic review.
The company has posted more than $3 billion of losses related to bad mortgages following the collapse of the subprime market. Griffin joined the board in June 2009, two years after Citadel invested in the online brokerage. The hedge fund cut its stake to less than 10 percent this year.
E*Trade is “basically saying they haven’t been able to reach an agreement with a peer,” Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview yesterday. “Now the question is: What is Citadel going to do?”
Charles Schwab and TD Ameritrade were the most likely buyers, Raymond James and Sandler O’Neill & Partners LP said in July. Acquiring E*Trade would require a buyer to take on the company’s “legacy loan portfolio,” which should be valued about $1.3 billion less than than the figure on E*Trade’s financial statements, O’Shaughnessy said today.
“This would necessitate a significant writedown, potentially leading to a corresponding need to raise capital, which could in turn severely dampen the price any potential buyer would be willing to pay,” he wrote today.
Charles Schwab Chief Executive Officer Walt Bettinger said on Oct. 26 that he wasn’t willing to buy corporations with “balance sheet challenges,” without naming any companies.
In the online brokerage business, E*Trade has been reporting growth. The company’s revenue-generating trades climbed to 164,715 per day on average last quarter, up 11 percent from the previous three months and 30 percent higher than a year ago. E*Trade added $2.1 billion in net new client assets in the quarter ending Sept. 30, an increase from both the second quarter’s $1.1 billion and the third quarter of 2010, when $700 million in client assets were added.
“They’re continuing with their fundamental game plan and it’s difficult to find a buyer,” Brian Bedell, a New York-based analyst with ISI Group Inc., said in a telephone interview yesterday. “The best thing for E*Trade is to continue to execute its plan, largely because the company continues to show reasonably good growth metrics.”
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