Investors yawn at online broker deals
U.S., Europe online financial sectors aren't reaping gains
By Emily Church, CBS.MarketWatch.com
Last Update: 1:45 AM ET April 13, 2002
LONDON (CBS.MW) - The prices online brokers E-Trade and Ameritrade paid this past week to acquire two smaller, active-trader firms blew the roof off valuations in the online financial sector.
US online broker deals aren't budging share prices
Yet share prices for the group aren't seeing much adjustment. Ameritrade (AMTD: news, chart, profile) shares have declined 7 percent since it announced a $1.3 billion all-stock deal April 7 to acquire Datek Online and that New Jersey broker's 840,000 accounts.
Stocks of the three largest online brokers in Germany have all edged lower since the start on the month even as consolidation expectations remain high for the handful of European online financial stocks, starting with an auction process underway for a majority stake in ConSors Discount (DE:542700: news, chart, profile).
E-Trade (ET: news, chart, profile) shares declined 5 percent Thursday, albeit in a down market after it announced an initial $100 million investment to acquire Tradescape Securities, a day trade brokerage, with an estimated 2,000 accounts. The deal will catapult E-Trade into the No. 1 spot for online trading volumes - a key metric for the sector, analysts confirmed. See full story on the E-Trade deal.
Investors are holding their applause for now.
"The market is saying it doesn't see a revenue pick up," said Diane Glossman, industry analyst at UBS Warburg.
Must be a pony in here somewhere
Shares of acquiring companies often recede after deals as investors price in concerns over profits and stock dilution, as well as integration costs. Yet both E-Trade and Ameritrade said they expect their respective deals to contribute to profits as soon as they are closed. The Ameritrade deal will dilute existing owners as Ameritrade expects to issue around double its share capital to pay for Datek.
Still the step-down in online financial stocks in the wake of the two U.S. deals comes as prices for the firms as measured on a per-account basis hit unexpected highs. Ameritrade (AMTD: news, chart, profile) set a new top for the industry by paying $1,500 per account for Datek Online.
In short, investors are pulling out of the stocks just as industry executives aggressively start making offers, giving every indication that they, at least, think something of a bottom has been hit.
Executives are making "doubledown" bets on a recovery in trading, according to Putnam Lovell's Rich Repetto. However, investors are clearly reluctant to share the risk that investors will get back to buying and selling stocks.
"I would have thought shares of Consors would have gone up after the Datek deal," said Peter Barkow, industry analyst at HSBC Trinkaus & Burkhardt. Like Ameritrade and E-Trade, the market is valuing Consors well under $1,500 an account.
Indications of something of a delay in the Consors auction could weigh on the shares, he added. E-Trade and and French bank BNP Paribas (FR:013110: news, chart, profile) are seen as the top two contenders. A decision had been expected earlier this month, but seller SchmidtBank has said it's still reviewing offers.
Consors rivals include Comdirect (DE:542800: news, chart, profile) and DAB Bank ((DE:507230: news, chart, profile), the third largest broker, is majority owned by Bayer Hypo-Vereinsbank (DE:802200: news, chart, profile). Comdirect is a unit of Commerzbank (DE:803200: news, chart, profile).
The Datek deal was said to have attracted four suitors - Datek's CEO Ed Nicoll termed the long bidding process as spirited. Bids were believed to have gone up over the last month.
Trending up
Per-account valuations are well off their peaks for the industry. In 1999, when the Nadsaq was roaring and new account growth soared, the market were valuing shares of the e-brokers in the many thousands.
Still the Datek deal tops the estimated $1,300 per account that the Bank of Montreal last November paid for the accounts of CSFBDirect.
The stocks meanwhile are trading around half of 52-week highs, and are all well off 1999 levels.
Some of the reason lies for the disparity is likely related to the niche that the big brokers are targeting: the day trader. The niche is valuable because its customers are always active - not as much as they were last year, but enough to generate revenue in downturns when a more typical brokerage customer withdraws completely.
There aren't that many day traders either; many are believed to have been wiped out in 2001, perhaps helping valuations for the survivors. A day trader is the term used for someone who trades actively for their own account and typically closes out positions at the end of the day. Strategies largely involve exploiting intra-day price movements.
The leading brokers are "now concentrating on in-market deals in order to consolidate what revenue exists," Glossman said.
"We have been expecting consolidation in the online brokerage business. We didn't feel there was sufficient scale for the companies to all be successful without gaining breadth across business lines," she said.
There may have to be a bit more before investors regain confidence. |
