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Ameritrade Might Just Claw Its Way Back


When Joseph Moglia was hired four months ago to turn around Ameritrade Holding Corp. (AMTD), Wall Street considered the online broker a goner. But on July 31, when he announced plans to buy the online trading operations of National Discount Brokers Corp. (NDB) from Deutsche Bank (DTBKY) for $154 million, investors did more than cheer: They boosted the battered stock price 9%, to $6.44.

The reason was simple: By picking up NDB's online unit, for which Deutsche Bank paid an estimated $250 million last year, Moglia finally convinced investors that Ameritrade has a fighting chance. Many believe that Moglia, 52, a former executive at Merrill Lynch & Co., was brought in to dress the firm up for a deal. And Moglia says he's still ready to negotiate for the right price.

But with NDB, Ameritrade has bought itself some options. By spreading its costs over an expanded roster of 1.8 million clients with $26.2 billion in assets, up from 1.5 million customers with $20 billion, Ameritrade could not only break even but also make a substantial profit--even with its dirt-cheap $8-per-trade fees. In its third quarter through June 30, Ameritrade managed to post a small profit of $70,000 for the first time since the quarter that ended in September, 2000. "We have often been asked if we have the wherewithal to make it on our own, and I have said that it is our job to unlock the potential inside of Ameritrade," Moglia told BusinessWeek.

Still, Moglia has a lot more work to do to ensure that the Omaha discount broker can thrive while retail investors are still reeling from losses. Internet stock trading has plummeted by more than 50% in the first six months of this year, hammering online brokers' two main sources of revenue--trading commissions and margin lending. Consequently, the stronger online brokers are drastically downsizing their workforces while going on shopping sprees to build up their client rosters, since few investors are opening new online accounts.

FEE ADDICTS? Picking up NDB's clients still may not deliver Ameritrade the quick profit boost it wants. Even though NDB.com racked up $67 million in revenues in the past 12 months, Richard H. Repetto, an analyst at Putnam Lovell Securities Inc., notes that NDB's 316,000 accounts averaged only 1.8 trades per quarter, 60% less than the average Ameritrade customer. And NDB customers, who have paid $14.75 per trade, will probably expect to be charged $8 like other Ameritrade customers.

Analysts also worry that Ameritrade is still too reliant on trading fees. While rival E*Trade Group Inc. (EGRP) receives more than 60% of its revenues from its online banking business, Ameritrade depends heavily on trading commissions. "[Its] model isn't sustainably profitable enough for Ameritrade to remain independent long-term," says UBS Warburg analyst Eric E. Wasserstrom.

But don't count Moglia out. Since taking charge, he has surprised analysts repeatedly by making drastic changes. Moglia has restructured the company while slashing 300 jobs. He has acquired day-trading company TradeCast and launched an online personal-finance center that gives investors financial-management tools. Who knows what dealmaker Moglia still has up his sleeve? By Pallavi Gogoi in Chicago


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