Did E*Trade Just Trade Up?

A decidedly unflashy CEO may be just what it needs

How well will E*Trade (ET ) do without star power? That's what analysts and investors have been asking since Chief Executive Christos M. Cotsakos stepped down on Jan. 24. The one-time college actor built the online brokerage and bank with flashy ads, and he once announced that the company was on a jihad against your father's way of managing investments. His replacement: Mitchell H. Caplan, whose background as a consensus-building lawyer pales against that of Cotsakos, who won a Bronze Star in Vietnam and took his executive team race-car driving.

But the switch isn't as abrupt as it looks. Caplan has been in the driver's seat at E*Trade Group Inc. for almost a year. Cotsakos picked him as chief operating officer and president in April and pushed him to become the company's front man--granting press interviews, speaking to investors, and shouldering the day-to-day management. "He's the one who understands banking and consumer lending and has made the decisions over the past year," says Richard H. Repetto, an analyst at Putnam Lovell NBF Securities Inc. "It's all about execution now. It isn't about just building the brand."

E*Trade needs lots of execution. With the market in the dumps, retail trading is anemic, and the firm has been forced to cut costs and raise fees. Banking competition is cutthroat. And the booming mortgage business--especially in refinancings--looks likely to plummet when rates finally start climbing. The firm lost $186.4 million last year, although it did earn a profit from ongoing operations of $161 million, on revenue of $1.27 billion. The stock rose 2.2%, to $4.59, in the first four trading days after the management shuffle, but that's still off its 52-week high of $10.62 in March.

Count on Caplan sticking with Cotsakos' diversification strategy. To bulk up E*Trade's business beyond retail brokerage, Caplan bought consumer-lending firm Ganis Credit Corp. and institutional trader Engelman Securities Inc. last year. He launched an E*Trade credit card and will bundle it for some customers with other banking and credit products. But he has put insurance and tax-preparation offerings on the back burner. "I don't want to add new products for the sake of new products," says Caplan, 45, who joined E*Trade when it acquired his online bank, Telebanc Financial Corp., in 2000. "We'll fine-tune and integrate the products we have slowly."

And don't wait for E*Trade to sponsor another Super Bowl halftime show or a Rolling Stones tour. Caplan will likely shy away from brand-building in favor of targeted marketing that pushes specific services. A foretaste: the October launch of E*Trade's "Power of 9" deal, which offers traders nine-second executions and trades for $9.99. That promotion helped raise trading volume in the fourth quarter by 11%.

Analysts expect the new strategy to show results this year. They estimate that E*Trade will post earnings from ongoing operations of $162 million to $198 million, driven largely by its banking and lending businesses. "This is not just a story of waiting for stock-trading volumes to pick up," says Edward Maran, associate portfolio manager at Thornburg Investment Management Inc., a large E*Trade shareholder. Adds E*Trade Director William A. Porter: "It's not like we've brought in a kid with no experience" to run the company.

Is Caplan's goal merely to tidy up the outfit for a sale? In the past, E*Trade talked to American Express (AXP ) about a deal, and Goldman Sachs (GS ) and Charles Schwab (SCH ) have been mentioned as potential suitors. Says one institutional holder: "They're a possible takeover candidate." Caplan will say only: "I am singularly focused on building the business for the long term."

After a public-relations debacle last year, when Cotsakos was famously shamed into returning $20 million of his $80 million pay package, E*Trade's board is taking no chances with Caplan. Despite the promotion, his pay remains the same: a $650,000 salary, plus a bonus that's capped at three times that figure. If Caplan can keep E*Trade on track, he'll certainly be worth every penny.

By Louise Lee in San Mateo, Calif.

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