Merrill Lynch, ETrade push toward financial portals
By R. Scott Raynovich
Redherring.com
June 2, 1999
A year ago, few people would have thought it possible that on the same day, Merrill Lynch (NYSE: MER) would announce $29.95 online stock trades and the ETrade Group (Nasdaq: EGRP) would buy a $1.8 billion electronic bank.
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On Tuesday, both companies took risky moves in an effort to look a little bit more like one another. Such actions may mark the transformation of online brokerages into more sophisticated portals for financial services, as the brokers look to set up financial services that can be offered to their subcriber bases.
"There's an incredible change in scope in the way people choose and execute online finances," says Jim Marks, managing director with Deutsche Bank Alex. Brown. "It's going to get a lot bigger, and the online brokers are going to go after all the financial services they can."
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CURMUDGEONLY CAPITULATION
Merrill Lynch, long viewed as the old-line curmudgeon in the financial world because of its stubborn resistance to the Internet, finally entered ETrade's line of business by announcing online trading for retail investors. By the end of the year, it hopes to offer either $29.95 individual stock trades or fee-based accounts that allow an unlimited number of online trades. The fee-based Internet accounts could be introduced as early as this summer, say officials from the company.
At the same time, ETrade is pursuing the stability and diversity of more traditional financial institutions by announcing plans to acquire Telebanc Financial Corp. (Nasdaq: TBFC), holding company for Telebank, an Internet-based provider of banking services, for $1.8 billion. Telebank offers basic services such as checking and savings accounts, but operates purely as a phone-and-network operation, without bricks-and-mortar branches.
Investors frowned on both companies' moves, knocking as much as 10 percent off of each of their valuations following the announcements. ETrade closed at $39.31 on Tuesday, falling $5.19, or 11.66 percent. Merrill dropped 8.75 points to $75.25, a loss of 10.42 percent.
The markets reacted not only to the impact on the bottom line of the companies involved, but to the somewhat questionable nature of the moves, say some analysts.
"ETrade paid an extraordinary amount of money for Telebank," says Mr. Marks. ETrade bid $1.8 billion in stock for a company that reported $41.7 million in revenue for the quarter ending March 31, 1999. "It's a questionable decision. There's not a lot of value there."
STALKING SCHWAB
The moves by both Merrill and ETrade may mark a new phase of competition in online financial services, in which breadth of services will become increasingly important.
Many online brokers, including ETrade, have already been successful in recruiting scores of online investors; they are now looking for more services to wave in front of their customers' eyeballs. Likewise, Merrill Lynch may finally have acknowledged that the Internet is becoming a conduit through which many financial services can be conducted.
"The big question now is who will win among the online brokers," said Genni Combes, analyst at Hambrecht & Quist. "It will be the broker with the best products, the most assets, the best information, and ease of use."
After adding online trading, Merrill Lynch has many of the items on that list, while pure online brokers such as ETrade are trying to catch up by adding traditional financial services such as checking accounts and research. Both companies are now better equipped to compete with Charles Schwab (NYSE: SCH), one of the leaders in online financial services.
"If you compare Merrill to Schwab, there's practically nothing that Merrill has that Schwab doesn't," says Mr. Marks. He questions Merrill's reluctance to enter the online brokerage business, citing its "lukewarm" approach and the lingering fear that online trading will cause dissension among the company's huge force of brokers.
Mr. Marks says that the difference between many of the online brokers is "fairly slight," and that the next step in the competition will be how much revenue each of the brokers can squeeze out of their customer bases. "The online brokers are in very enviable positions -- they have developed online financial relationships, and as soon as you add a new account, you're adding cash flow. But if they're still just online brokers three years from now, it will be a huge missed opportunity," he warns.
For Merrill Lynch's stockholders, the competitive climate of the Internet is not necessarily a pleasant place to be. The company is likely to experience an adverse effect on its balance sheet as it adjusts from charging anywhere between $50 and $200 per stock trade to charging $29.95 per online trade.
"The market doesn't like it when you take into account that there's going to be a revenue hit, a market budget hit, and a technology hit [associated with the move to online brokerage]," says Mr. Marks.
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