E*TRADE Financial Corp. is willing to consider a deal as it plots its path forward, though executives expect the online broker to be more competitive in a free-trading landscape.
"While we did not desire the move to zero commissions, it has removed really the final point of differentiation in the marketplace and it substantially improves our competitive position," CEO Michael Pizzi said on an Oct. 17 third-quarter earnings conference call. "We are well aware that possible combinations or alternatives could accelerate shareholder value. If that's the case, we remain open to all discussions as we always have been."
After eliminating commission fees for clients trading U.S. stocks, options and exchange-traded funds online, the New York-based company has found itself once again the subject of a frenzy of M&A speculation.
Larger rivals such as TD Ameritrade Holding Corp. and big investment banks such as Goldman Sachs Group Inc. have historically been some of the most mentioned companies that could look to acquire the smaller E*TRADE, though Goldman Sachs' Chairman and CEO David Solomon recently told analysts the company is not interested in buying an online trading platform. Interactive Brokers Group Inc. Chairman Thomas Peterffy also recently said his company was not going to explore an E*TRADE deal.
E*TRADE's decision to slash commission fees, which was part of an industrywide price war, came nearly a year after Executive Chairman Rodger Lawson expressed confidence about the company's future growth potential. At the time, Lawson and then-CEO Karl Roessner outlined a number of new growth initiatives E*TRADE would be pursuing in the coming years, including mid-teens EPS growth that would double its earnings strength by 2023.
By eliminating commission fees, the company now expects to see an annual hit to its revenues of about $300 million. The company also adjusted its prior earnings expectations, with E*TRADE's Pizzi saying it will now take until 2024 to reach $7.00 EPS rather than 2023 as previously anticipated.
To make up for those lost revenues, Pizzi said the company plans to execute its expense reduction initiatives "with even more vigilance." Among the expense-reduction efforts E*TRADE's top executive outlined was a plan to consolidate its New York City and Jersey City offices by year-end. That move will likely cause a charge of about $10 million in the fourth quarter, but will ultimately lead to about $5 million in annual savings, CFO Chad Turner said on the call.
The elimination of commission fees does level the playing field for E*TRADE against its peers Charles Schwab Corp. and Fidelity Investments too. The company previously charged $6.95 per trade, whereas both Schwab's and Fidelity's commission fees were $4.95.
"What we know today is, our competitive position is substantially improved," Pizzi said. "It's early, but we're seeing a lot of anecdotal stories and evidence of [winning] back some customers."