Online brokerage E-Trade Financial Corp. said Monday that it agreed to acquire rival Harrisdirect in a $700 million deal as the online brokerage industry consolidates amid fierce price competition and declining customer activity.
“When we look back three years ago, we’d talk about how there was a need for consolidation,” said Jarrett Lilien, E-Trade’s president and chief operating officer. “It’s mind boggling that there hasn’t been any consolidation... We’ve been talking to a lot of people for the past three years, but the tone has changed.”
E-Trade plans to announce more deals in the next three months, Lilien said. The company had $685 million in free cash at the end of June.
Montreal-based BMO Financial Group, which owns Harrisdirect parent Harris Bankcorp, said it is selling the online-trading unit following an assessment of the company’s ability to compete “in a changing landscape.”
“Given the additional amount of capital that would have been required to grow the business and remain competitive in the current environment of consolidation, we concluded that Harrisdirect would be more valuable to another participant in the online brokerage industry,” said President and Chief Executive Tony Comper.
Harrisdirect currently has about 430,000 customer accounts with an average account balance of more than $70,000 and executes about 15,000 trades a day.
The deal gives E-Trade $32 billion in assets, $1 billion in margin debt and $5 billion in cash. It also gives the company Harrisdirect’s customer service division, which was rated first among online brokerages by Smart Money magazine and Barron’s newspaper.
“We’re very competitive in price ... where I think we were a little behind, frankly, was customer service,” Lilien said. The two companies’ customer service operations will be integrated over the next year, he said.
The transaction is projected to generate about $186 million in cost savings and should boost yearly profit by 17 cents per share once the integration is completed, E-Trade said.
Following the combination, E-Trade will have about 130,000 daily average revenue trades from its 4 million customer accounts representing about $130 billion in total assets.
In 2004, E-Trade’s annual earnings nearly doubled to $389.1 million, or $1.01 per share, as revenue climbed 6 percent to $1.53 billion.
With trading volume down sharply across the industry since the collapse of the dot-com boom five years ago, analysts speculated that online brokers would begin looking to consolidation as a means of staying competitive.
Last month, shares of Charles Schwab Corp. gained amid rumors that the company would be swept up in a wave of industry takeovers. Schwab, however, maintained it is not for sale, and is hoping price cuts will drive client transactions.
And earlier this summer, Ameritrade Holding Corp. shunned a $5.5 billion bid from E-Trade and instead agreed to buy up rival TD Waterhouse from Toronto-Dominion Bank in an all-stock deal worth about $2.9 billion.