E-Trade to Acquire Rival Brokerage Harrisdirect

Online broker E-Trade Financial Corp. said Monday that it would buy U.S. rival Harrisdirect from Canada’s BMO Financial Group for $700 million in cash to strengthen its position in the online brokerage industry.

The deal will help New York-based E-Trade to accelerate its growth plans by gaining 430,000 customers with an average account balance of $70,000. BMO, on the other hand, is getting rid of a business that lacked the necessary scale to be successful in the long term.

Harrisdirect, which was founded by brokerage group Donaldson, Lufkin & Jenrette and later owned by Credit Suisse First Boston, is not profitable but gives E-Trade $186 million of financial synergies. The synergies will be in the form of $114 million from cost cuts and $72 million from additional revenue.

Wall Street applauded the deal. E-Trade shares rose to a session high of $16.50 and closed at $16.10, up $1.24, or 8%.

“The benefits are clear. It is a positive for the company,” said Richard Reperto, an analyst at Sandler O’Neill & Partners who has a “buy” recommendation for E-Trade shares.

E-Trade said the deal, which is expected to close by October, should increase annual earnings by 10 cents a share in the first year and 17 cents a share in the second year, when Harrisdirect is expected to be fully integrated.

The deal highlights the consolidation mood of the industry, which is looking for ways to win new customers in different markets as online equity trading grows more common.

This year, E-Trade’s overtures toward another online broker, Ameritrade Holding Corp., were rebuffed. Later, in June, Ameritrade agreed to buy rival TD Waterhouse USA from Canada’s Toronto-Dominion Bank.

“The industry is expanding, but the growth rate is slowing down” in equity markets, said Jim Gray of OptionsXpress, an online trader of equity options.

Until recently, online brokerages have managed to lure new customers by reducing brokerage commissions. But now they see revenue coming by offering a broader platform of products to customers, said William Cline, a managing partner of consulting firm Accenture’s capital markets division, who forecasts more consolidation.

“To achieve more scale and innovation ... we are going to see further concentration of power in this segment,” Cline said.

E-Trade said acquiring Harrisdirect would bring it about $32 billion in assets. The combination would have more than 4 million customer accounts, about $130 billion in customer assets and about 130,000 daily average revenue trades.

E-Trade President Jarrett Lilien said the acquisition would help the company achieve its goal of raising operating margins to 40% from 36%.

BMO said it decided to sell Harrisdirect because additional capital would have been needed to enlarge the business and keep it competitive in the current environment.

“We concluded that Harrisdirect would be more valuable to another participant in the online brokerage industry,” Chief Executive Tony Comper said in a statement.

In a note to clients, investment bank Fox-Pitt, Kelton said Harrisdirect lacked the necessary scale and did not appear to be taking advantage of client cash opportunities.