After the online brokerage industry's largest deal yet, E*TRADE Financial Corp. again faces a choice: go it alone or seek a buyer.

The smallest of the publicly traded brokers has long been viewed as the industry's most likely acquisition target, potentially drawing interest from investment banks, traditional banks, and rival brokerages. Speculation that a deal was on the horizon only escalated after E*TRADE and its peers introduced free trading in October. Now, with Charles Schwab Corp. striking a massive $26 billion announced bid to acquire TD Ameritrade Holding Corp., E*TRADE's future is still in limbo.

Some analysts expected the news of zero commissions to be the final nail in the coffin of E*TRADE's independence. Several analysts upgraded E*TRADE following October price cuts in anticipation of a deal, even as they were downgrading Schwab and TD Ameritrade. But the company has faced rising competitive pressures in the past, and each time, it has remained independent.

Founded in 1982, E*TRADE rose to fame as a technology-driven disruptor of the brokerage industry. The company saw hefty losses in the early 2000s after the tech bubble popped. E*TRADE then launched into banking to diversify its revenues — a move that would come back to bite it. By June 2007, available-for-sale mortgage-backed and investment securities made up 27% of E*TRADE's total assets. That exposure to the subprime mortgage market led E*TRADE's stock to plummet 85% during the financial crisis.

Only an infusion of cash and loans from private investors, namely Citadel LLC, kept the company afloat. The Chicago-based hedge fund giant pumped several billion dollars into the firm in 2007. It sold its roughly 10% stake in 2013. Through commissions and fees, E*TRADE's core brokerage business helped it avoid a total collapse.

"I think they're really kicking themselves that they didn't [sell]. The stock is demonstrably below that level now," UBS analyst Brennan Hawken said in an interview. Almost a decade later, in an attempt to catch up with higher-growth competitors, E*TRADE's board set a series of growth targets that, if not met in a two-year window, would have led the directors to pursue a sale.

"They had a chance to sell themselves last summer, and for a pretty attractive price," Hawken said. E*TRADE's board concluded its strategic review of the company but opted to remain independent, though the expectation of a merger again reared its head.

Aite Group analyst Greg O'Gara said E*TRADE survived "the worst possible scenario" following the financial crisis.

"That was probably a worse circumstance than what exists today with zero commissions," O'Gara said in an interview. "They went on to profitability, and they survived. So again, anything is possible."

Another brokerage buyer

E*TRADE's place in the potential M&A framework is "more in question than at any point in recent history," Jefferies analyst Daniel Fannon said in a Nov. 24 note.

With the two most likely buyers off the table, E*TRADE "still makes sense in the hands of a lot of different companies," UBS' Hawken said. The two other major brokerages, privately held Fidelity Investments and Interactive Brokers Group Inc., could be potential buyers.

But a bid from either of those companies "would be inconsistent with those firms' histories," Hawken said.

Neither firm has a federal bank subsidiary, and E*TRADE does. Any nonbank seeking to acquire E*TRADE would have to become a bank to do so, a step that would complicate a potential merger. Interactive Brokers recently applied for an industrial bank charter, which would smooth over that hurdle if the application is approved.

There is also a "cultural difference" between Interactive Brokers and E*TRADE, Hawken said. The former has "an engineer-dominated culture" that focuses on programming, the analyst said. It tends to cater offerings to its more active trading clientele, while E*TRADE is focused on primarily serving mom-and-pop investors.

Buying E*TRADE would add scale to Fidelity's stock plan business, which several analysts see as E*TRADE's strongest asset. If a company wants to reward its employees with stock, it would do so through a platform like E*TRADE's. It would also likely provide platform upgrades to Fidelity's current offering, Hawken said.

E*TRADE did not respond to a request for comment.

Investment bank chatter

Following the Schwab-TD Ameritrade deal announcement, some analysts speculated that Goldman Sachs Group Inc. or Morgan Stanley might be interested in buying E*TRADE. E*TRADE's bank has more than $50 billion of low-cost deposits, which would be attractive to many financial institutions in an increasingly competitive fight for funds.

However, Goldman Sachs CEO David Solomon also shot the idea down on the company's third-quarter earnings call in October, saying his company is not focused on the discount brokerage area.

In an October research note, Keefe Bruyette & Woods analysts said neither investment bank is likely to buy E*TRADE. The discount broker would provide Morgan Stanley with a self-directed online platform, but it would provide few other benefits for the wealth management business, the analysts said.

E*TRADE's focus on average retail investors is inconsistent with the business model at big wirehouses like Morgan Stanley, which have focused on providing comprehensive financial planning tools and products to high-net-worth customers.

But Hawken thinks a Morgan Stanley-E*TRADE tie-up makes sense.

The firm launched a new compensation plan in April 2019 that rewarded its advisers for working with smaller households as opposed to the richest clients, though Morgan Stanley's compensation plan in 2020 encourages advisers to once again pursue wealthier clients.

In the first half of the year, Morgan Stanley closed its $828.9 million acquisition of Solium Capital, one of E*TRADE's biggest competitors in its corporate services business. Now called Shareworks by Morgan Stanley, the company provides software for equity administration, financial reporting and compliance — the same corporate stock plan that business analysts call one of E*TRADE's best assets. That intersection with Shareworks could be a point in favor of a Morgan Stanley tie-up.

Even though an acquisition is likely being priced into E*TRADE's stock, several analysts questioned whether the company is putting itself on the market at all.

"Now that we're away from the capital issues that existed a decade ago, it does seem like willingness is part of the problem," Hawken said.