ETrade Says Merger With Telebanc Challenged by U.S. Thrift Regulations
ETrade Group Inc. said its $1.1-billion merger with Telebanc Financial Corp. is in jeopardy because U.S. regulators assert its biggest shareholder, Japan’s Softbank Corp., would effectively control the Internet bank through its business links to ETrade.
Telebanc shares fell $5.13, or 15%, to close at $28.44 on Nasdaq, after ETrade detailed the objections by the federal Office of Thrift Supervision in a merger prospectus filed late Monday. The objections stem from rules barring control of more than 25% of a U.S. thrift by a foreign company. Softbank owns 26% of ETrade, the No. 2 Internet broker, and the two have a joint venture and other ties.
“Softbank America has filed with the [OTS] seeking to rebut the regulatory presumption of control,” the prospectus said. “The OTS staff has indicated, however, that the existence of a joint venture between ETrade and Softbank in Japan, along with several instances in which ETrade has an investment in or contractual relationship with a company that is also a Softbank investee, may lead the Office of Thrift Supervision to deny the rebuttal of control.”
The OTS is unlikely to rule on the merger by year-end, according to the prospectus, so either party can abandon the transaction, aside from a $54-million payment Telebanc would owe ETrade. The two companies first announced their plan June 1.
“If this whole deal does go through, ETrade is now under the regulation of the OTS, so ETrade can’t be as flexible,” said Amar Mehta, an analyst with CIBC Oppenheimer Inc. ETrade Chief Executive Christos Cotsakos “has all these visions of being a media company, doing auctions, and if he’s under the OTS he can’t do all that stuff.”
San Francisco-based ETrade shares fell $2.44 to close at $32, also on Nasdaq. The firm sought to buy Telebanc to add banking to its array of online financial offerings as it battles for new accounts with such firms as Charles Schwab and Merrill Lynch.
Softbank has told ETrade “that it is not willing to become a savings and loan holding company,” the firm said in the prospectus. “As a result, if the OTS does not accept a rebuttal of control from Softbank America, regulatory approval of the merger would not be obtainable and the merger could not be completed.”
