Cool post from Yahoo as it applies to on-line brokers...
Part 3
by: RickRak2000 18504 of 18512
Merrill says it plans to combine its Private Client Technology group with D.E. Shaw Financial Technology's Internet and software development group. As previously planned, it expects to roll out online trading for selected fee-based clients in the next several weeks. Merrill had been developing its own Internet services and painfully inching closer to offering Internet trading. But the firm has been schizophrenic about online trading, denouncing it on the one hand and pledging to eventually offer it on the other.
Brokers Buying Brokers
Potential mergers or acquisitions aren't limited to full-service firms and banks playing catch-up.
In the online brokerage sector, the top three firms -- Charles Schwab (SCH:NYSE), Toronto Dominion's (TD:NYSE) Waterhouse and E*Trade (EGRP:Nasdaq) -- accounted for more than half of fourth-quarter online trades, according to Piper Jaffray.
At the same time, customer and regulatory standards about technology are rising. Volume is exploding. Customers want more services and more sophisticated Web sites, and brokers want to build out services so they aren't as dependent on low commission equity trades. The spending of the top players has capped out the smaller guys, says Appleby at ABN Amro.
Costs of the necessary hardware and software are high and will remain high. E*Trade, for example, spends tens of millions and still suffers technology problems. A small broker or one with low commissions might not be able to keep up with technological demands.
"The stakes are going up, and the price to play is getting higher. The little guys are going to be squeezed and they are going to have to sell," says one industry insider.
If smaller brokers are struggling with rising costs, they may be willing to sell to another broker interested in getting more accounts or expertise in a particular technology area at a reasonable price. Waterhouse, for example, bought online discount broker Jack White in 1998 for about $100 million, increased its account base by 15% and pushed itself into the No. 2 spot in terms of market share.
While publicly traded online brokers are valued at Internet stock levels, pushing up the value of other brokers and therefore the acquisition price, there are strong reasons for buyers to act soon. Barriers to competition, already high, can only increase.
Among the online brokers, E*Trade has made it clear it is acquisition-minded and has more than $500 million in cash to back up its intentions. Ameritrade (AMTD:Nasdaq) says it is willing to buy if the price is right. During the past few months, it has become clearer what stakes are needed to stay in the game. The time for action may have arrived.
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