from thestreet.com
Suretrade Spinoff a Model for Online Broker Pricing
The potential sale of Fleet Financial's (FLT:NYSE) Suretrade unit -- to another company or to investors -- may show just how much accounts matter.
With online brokers trading near all-time highs, Fleet announced Thursday that it may spin off or find a joint venture partner for Suretrade, the No. 9 online broker. With a market cap of $5.8 billion at Friday's close, No. 3 online broker E*Trade, (EGRP:Nasdaq) is trading at about $8,600 for each account it had at December's end. With a market cap of $2.6 billion, Ameritrade (AMTD:Nasdaq), the No. 6 online broker, is worth about $7,300 for each account. (The rankings of online brokers are based on the number of online transactions during the fourth quarter, as cited by Piper Jaffray.)
That's pretty heady stuff. All this generates great speculation about how Suretrade, and other brokers that may go public or be acquired, will be priced.
There's no denying Suretrade is a nice package. It has over $1.1 billion in customer assets, 250,000 accounts and about 11,500 trades per day. It went from nothing to the No. 9 broker in terms of transactions in a little over a year, according to Piper Jaffray, thanks in part to its active customer base. Suretrade's trades per day increased 42% in 1998's second half, and its accounts grew about 100% during the same time.
In spinning off or selling Suretrade, Fleet says it wants to maximize shareholder value. Speculating on Suretrade's valuation, Fleet spokesman Charles Salmans points to various industry reports that value online brokerage accounts between $2,000 and $10,000 each. Using that range, Suretrade could be valued between $500 million and $2.5 billion.
But if buyers are interested in the quality of accounts, Suretrade might sell at the low end of the range. Its assets per account are rock bottom, meaning its account base isn't as valuable as the account base of some competitors. At the fourth quarter's end, Suretrade had about $5,000 per account, according to its own numbers, the lowest of the top 10 brokers. That compares with about $22,000 per account for E*Trade, $42,000 for Ameritrade and $17,000 for No. 7 broker DLJdirect, which Donaldson Lufkin & Jenrette (DLJ:NYSE) is considering spinning off.
Assets per account are affected by the number of accounts that exist but aren't active. In other words, Suretrade's active accounts may have a good number of assets -- it's hard to trade with less than $10,000 -- but a big chunk of its accounts aren't active, dragging down the average assets per account.
In addition, Suretrade, with its cheap $7.95 base commission, has a reputation for attracting active traders, customers who may be more susceptible to market fluctuations. But assets also tend to be smaller when accounts are new. Suretrade, which opened for business in November 1997, is one of the youngest brokers.
Suretrade's real value is its infrastructure and its ability to handle several hundred thousand accounts, says Alex Stein, a principal at Gomez Advisors, which rates online commerce services and consults for interested buyers and sellers of online brokerage services.
An institutional-oriented firm looking to add a retail arm or a retail-oriented firm looking to add online distribution could do it quickly with Suretrade, says Stein. He expects an outright sale, not a joint venture or a public offering.
Fleet declined to give a time frame for an announcement or say whether the company is already in talks with interested parties.
Damn the Torpedoes
Online broker ads are going over the top.
Retail investors have swarmed online, expecting 10-second executions, rocketing Net stocks and easy money. Of course, online trading systems can't guarantee flawless trading or an extended bull market. Recent technology problems and tales of novices losing thousands have made brokers the subject of regulatory hand wringing. But some online brokers are trying to keep things light.
Recent ads from Discover Brokerage Direct, a Morgan Stanley Dean Witter (MWD:NYSE) unit, show a corporate raider bartender and a rebellious, helicopter-flying teen, both Discover users. That's in addition to the tow-truck driver who owns his own island. A new campy ad from Ameritrade shows two geekily hip twenty-somethings discussing the ease of making money with Ameritrade. E*Trade's ads court investors by depicting live brokers so calculating and self-absorbed, they seem to have been lifted straight out of In the Company of Men.
"They're supposed to be over the top," says Discover spokesman Robert Livingston. "We're not saying invest with us and you'll get a helicopter or an island. The point is to be so far over the top and be humorous."
Livingston says the goal is to use humor to reduce some of the intimidation people feel when they consider investing, especially investing online. Livingston says to expect more ads, created by San Francisco-based Black Rocket (Yahoo!'s (YHOO:Nasdaq) ad agency), in addition to the one that's just hit the airwaves.
But Charles Schwab, who appears in his own company's ads promoting the benefits of using Schwab's (SCH:NYSE) Web site to manage IRA accounts, doesn't think Discover's ads are very appropriate, according to a Schwab spokeswoman.
Schwab certainly takes a different tack, pitching the benefits of long-term investing and the human touch. The ads even lack the humor of Fidelity's similarly traditional approach to investing. But, while Schwab's ads may not be sexy, they might be more in line with the day-to-day drudgery of financial planning. |
