Etrade telebank merger in trouble
<<*Trade Group Inc. said its $1.1 billion merger with Telebanc Financial Corp. is in jeopardy because U.S. regulators assert its biggest shareholder, Japan's Softbank Corp., would effectively control Internet banker Telebanc through its business links to E*Trade.
The objections by the federal Office of Thrift Supervision were contained in a merger prospectus filed late Monday. The objections stem from rules barring control of more than 25 percent of a U.S. thrift by a foreign company. Softbank owns 26 percent of E*Trade, the No. 2 Internet broker, and the two have a joint ventures and other ties.
''Softbank America has filed with the (OTS) seeking to rebut the regulatory presumption of control,'' the prospectus said. ''The OTS staff has indicated, however, that the existence of a joint venture between E*Trade and Softbank in Japan, along with several instances in which ETrade has an investment in or contractual relationship with a company that is also a Softbank investee, may lead the Office of Thrift Supervision to deny the rebuttal of control.''
The OTS is unlikely to rule on the merger by year-end, according to the prospectus, so either party can abandon the transaction, aside from a $54 million payment Telebanc would owe E*Trade. The two companies first announced their plan June 1.
''One would have to be very optimistic to think that the transaction would close by year-end, and the parties haven't tried to calm the markets by extending the agreement three months,'' said Richard Zandi, analyst with Salomon Smith Barney. ''Still, no one forced them to file a proxy and it's unlikely they would do so without intending to complete the transaction.''
E*Trade firm sought to buy Telebanc to add banking services to its array of online financial offerings as it battles for new accounts with firms like Charles Schwab Corp. and Merrill Lynch & Co.
''If this whole deal does go through, E*Trade is now under the regulation of the OTS, so E*Trade can't be as flexible,'' said Amar Mehta, analyst with CIBC Oppenheimer Inc. E*Trade Chief eXecutive Christos Cotsakos ''has all these visions of being a media company, doing auctions, and if he's under the OTS he can't do all that stuff.''
Tokyo-based Softbank sells PC software and owns stakes in Yahoo Inc., Ziff-Davis Inc., MessageMedia Inc. and CyberCash Inc., among other Internet commerce companies. It also makes venture capital investments in private firms.
Softbank has told E*Trade ''that it is not willing to become a savings and loan holding company,'' the firm said in the prospectus. ''As a result, if the OTS does not accept a rebuttal of control from Softbank America, regulatory approval of the merger would not be obtainable and the merger could not be completed.''
Softbank is even less likely than E*Trade to accept U.S. thrift regulatory strictures, said Mehta. ''Softbank wants to invest in everything,'' he said. ''They don't want to be tied down.''>>
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