From my friend Jim Cory at www.thestreet.com
19 3/4 on Friday was god sent ,,
There's a Silver Lining In the Cloud
Over E-Trade
By Cory Johnson
The badly beaten shareholders of E-Trade might feel like
they're out of the race. But it ain't over yet, and a dark horse
might just give the company a second wind.
The Palo Alto, Calif.-based online brokerage is going full tilt to
establish a powerful market share in the Internet
stock-trading arena. But as its marketing and build-out
expenses have grown, its share prices have stumbled badly.
Now, some on the Street are starting to realize that potential
competitors will be slowed by an unexpected weight - the
Year 2000 problem.
"Bears on the Street say that E-Trade is toast," says
hedge-fund manager Howard Love of Love Capital
Management. "They say that anytime the wire houses -
Smith Barney, PaineWebber, Merrill Lynch, AG Edwards -
want to, they can crush these guys."
But E-Trade has fewer legacy computing systems than its
giant rivals and thus little Y2K risk. When the calendar turns
from 1999 to 2000, the computer systems of giant financial
institutions will go on the fritz unless the companies execute
a multimillion-dollar fix. But with fewer than 400 work days
left before the new millennium, the last thing IT managers
want to do is retool their trading systems to run on the
Internet.
On paper, a merger between Citibank and Smith Barney
parent Travelers would make for a natural Internet
brokerage. No way, says Citibank's Year 2000 project head,
Jim Devlin. "We've got 70 percent of our developers around
the world working on the Year 2000 problem," he says. "We
have about 500 million lines of code to look at, and that's the
number one priority for this organization. . We can't take on
any other projects." Indeed, filings with the Securities and
Exchange Commission reveal that Citibank/Travelers is
planning to spend at least $800 million on Y2K remediation.
That kind of problem creates a whole new barrier to entry in
the Internet trading market, and E-Trade CEO Christos
Cotsakos knows it. "Our entire plan is geared toward building
right now, not two years from now," he says. "We don't
have a five-year plan; we don't have a two-year plan; we
have a 90-day plan."
Last September, E-Trade's stock ran up 46 percent, capped
off by a presentation by Cotsakos at the Montgomery
Securities Growth Conference. Since then, the stock has
tanked 57 percent.
Now some on Wall Street see a bottom to E-Trade's slide. "I
was short [Internet brokerages]," says Love. "But I covered
this a few days ago. The stocks have been looking a lot
stronger and I've lost the conviction that things are going to
get worse
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