Ameritrade deal could signal trend
Valuation expectations still 'not realistic,' exec says
By Emily Church, CBS MarketWatch
Last Update: 1:17 PM ET Aug 10, 1999
Also: NewsWatch
NEW YORK (CBS.MW) -- Discount brokerage R.J. Forbes Group
was accustomed to much larger rivals sniffing around, seeking to beef up
their account rolls via acquisitions.
But Kenneth Kraska, president of the 12-year-old
Melville, N.Y., brokerage, held fast. He sought to
court online investors with forward-looking services
such as wireless trading capability.
No more. R.J. Forbes was sold this week to
Accutrade, a subsidiary of Ameritrade (AMTD:
news, msgs). The sale didn't merit much attention,
yet some industry executives say it could signal
more deals.
Terms weren't disclosed : The market is currently
valuing e-brokerages between $5,000 and $6,000
an account even after "the carnage," says James
Marks, analyst at Deutsche Banc Securities.
Between 25 and 30 percent of R.J. Forbes'
approximately 7,500 accounts are online-based.
What's changed?
To Kraska, keeping up with the technology
investments and customer demands for more
services and products was becoming a losing
proposition.
"Of course, I am hoping I'm getting out at the top," he said. "When your
competition becomes Merrill Lynch ... it becomes very difficult to provide
them with everything they're demanding at $9.95 a trade."
Ameritrade provided the best fit for his customers, he said.
Competition also heats up when growth starts to show signs of slowing in
an industry, as appears to be happening to the e-brokers.
"When you have a
month like June,
where, as I far I know,
it's the only time since
Web trading began
that there's been a real
issue of a slowdown, it
will make some of the
smaller firms think
twice about what the
future brings," said
Tom O'Connell,
president of Discover Brokerage, Morgan Stanley Dean Witter's (MWD:
news, msgs) online brokerage unit.
The online trading industry "suffered its first reality check," according to
Piper Jaffray's Steve Franco, on reports that volume growth slowed in the
second quarter to 8.2 percent even as account growth was robust.
Leading brokers Ameritrade, E-Trade (EGRP: news, msgs), Charles
Schwab (SCH: news, msgs), DLJdirect (DIR: news, msgs) and TD
Waterhouse (TWE: news, msgs) are down an average of 3 percent from
Aug. 3, when analyst Bill Burnham released a report on the transactions
slowdown. Schwab is up 3 percent for the period through Aug. 9 -- the
lone gainer in the group.
"I think you're going to see some more firms about our size, or a little
bigger, deciding to call it a day," Kraska said.
Yet even though O'Connell said he's heard of two small online-only firms
that are now shopping for buyers, he added that valuation expectations
are still too high to prompt a real consolidation wave.
"The problem is that the costs per account have these Internet multiples,
and that's not realistic," he said. "There's a real gap still between what an
owner of an Internet brokerage firm wants for the customer base and
what anyone's willing to pay for it."
Marks agreed: "I think there is going to be some consolidation, but, if you
are going to get there, you have to see some collapse between the
bid-and-ask spread."
The merger-and-acquisition cycle typically slows after a drop in the
market, he added, noting that it takes sellers time to adjust to lower
prices.
Emily Church is the New York bureau chief for CBS MarketWatch.
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