Bloomberg News

E*Trade Hires Morgan Stanley to Explore Sale After 94% Drop

July 22, 2011

(Updates with shares in first and seventh paragraphs.)

July 22 (Bloomberg) -- E*Trade Financial Corp. plans to hire a banker to explore a sale of the online brokerage after its largest shareholder, Citadel LLC, said the company needed to take action to reverse “catastrophic losses” for investors. The shares surged.

E*Trade, which has lost 94 percent since June 2007, surged 21 percent since July 19 after Citadel called on it to hold a special meeting and remove two directors. The New York-based company’s board decided to hire Morgan Stanley to explore a sale and alternatives, according to a statement today. E*Trade said it won’t hold a special meeting.

Call-option trading surged today amid bets the company will be acquired, Steve Sosnick, equity risk manager at Timber Hill LLC in Greenwich, Connecticut, said in a telephone interview. Volume has exceeded 20,000 contracts for three straight days, a first for the company, according to data compiled by Bloomberg.

“There is a lot of takeover speculation,” he said. Citadel “is agitating for a sale, but who’s going to buy it?” he said.

Walt Bettinger, the chief executive officer of Charles Schwab Corp., said today that any potential buyer of E*Trade must consider “capital holes that need to be filled under purchase accounting rules, the dependency on transactions and the vulnerability it would create.” Schwab, based in San Francisco, is the biggest independent U.S. brokerage by assets.

Shares Rally

Susan Hickey, a spokeswoman for E*Trade, declined to comment on takeover speculation.

E*Trade shares climbed 4.3 percent to $16.31 as of 4:58 p.m. in New York. The announcement that Morgan Stanley had been hired was sent after the 4 p.m. close of U.S. exchanges. The shares gained 21 percent this week, the most since June 2009.

More than 25,000 contracts to buy the stock changed hands as of 4 p.m. in New York today, 5.7 times the four-week average, according to data compiled by Bloomberg. The most-active E*Trade options were September $18 calls, which surged 54 percent and accounted for 47 percent of all options trading. The shares, which rose 1.3 percent to $15.64, haven’t closed above $18 since April 2010.

E*Trade has posted more than $3 billion of losses related to bad mortgages following the collapse of the subprime market. To help E*Trade avoid bankruptcy, Citadel injected $2.55 billion of cash into the company in November 2007. Kenneth Griffin, founder of the hedge-fund operator, joined E*Trade’s board in June 2009 and has been selling shares and lowering the firm’s stake this year.

--With assistance from Jeff Kearns in New York. Editors: Nick Baker, Chris Nagi

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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