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E*Trade Rises From The Ashes


Mitchell H. Caplan insists he never doubted that E*Trade Financial Corp. (ET) would survive. Not when shares of the online broker and bank plunged from more than $60 at the peak of the Internet frenzy to below $3 in 2002. Not even when the outfit lost a total of $428 million in 2001 and 2002. "I felt great about the business model," says the 47-year-old lawyer-turned-entrepreneur who rose to chief executive two years ago and was charged with getting the company on track. "I knew that if we stuck with it, we would get our story out."

Caplan's optimism has paid off. While E*Trade was given up for dead after the dot-com bust, its prospects now look bright. The nation's third-largest online broker just wrapped up its second profitable year in a row, earning an estimated $376 million on $1.52 billion of revenue. The company also told Wall Street that earnings could come in above $400 million this year on as much as $1.8 billion in revenues. Investors have bid E*Trade's stock up to $14 a share. "They survived the bubble, and they've come out the other end much stronger," says Friedman, Billings, Ramsey Group Inc. analyst Matthew J. Snowling.

Sure, the stock market rebound has helped, but much of the credit goes to the buttoned-down Caplan. Confronted with a culture that ignored red ink as long as the stock price climbed, he quickly went to work cutting costs and focusing the business. E*Trade no longer splurges on $2 million Super Bowl commercials. Instead of the $500 million a year it once spent on marketing -- more than the entire U.S. liquor industry spends on ads -- it will lay out a modest $140 million this year. Caplan also dispensed with distracting sidelines: a national ATM network, kiosks in Target (TGT) stores, a palatial New York retail branch that sold E*Trade souvenirs, and a TV business-news service. New ventures, such as a string of small storefront offices in major cities, are rigorously vetted for profitability. "I am adamant -- and as a team we are all adamant -- about financial returns," he says.

RUBBER CHICKENS

Symbolic measures may have been as important in instilling discipline in the ranks. Breaking with E*Trade's wild past, Caplan moved the headquarters from Menlo Park, Calif., to New York City. Left behind were the propeller beanies and rubber chickens, geeky props that kept the atmosphere loose. Now jackets and ties are de rigueur. There are fewer employees, too: about 4,000, down from 5,000 at the peak.

Caplan joined E*Trade just as the Net frenzy was ebbing in 2000. A native of Virginia, he earned a law degree and an MBA from Emory University in Atlanta and practiced law in New York for five years. In 1989 the entrepreneurial bug bit, and he launched a branchless savings and loan, TeleBank. He figured customers would bank by phone, mail, and ATMs to get cheaper rates on loans and higher yields on deposits.

Eventually phone access became Net access. That drew E*Trade's attention: It soon plunked down $1 billion in stock to buy TeleBank. As Caplan integrated his bank into E*Trade's fast-growing brokerage operation, he focused on "boring stuff," he says, such as growth in revenue and earnings and return on equity. Impressed with Caplan, E*Trade's board elevated him from chief banking officer to North American head and then to president and chief operating officer.

By the time Caplan became CEO in January, 2003, the company was in free fall. The former CEO, the exuberant Christos M. Cotsakos -- who once had employees stand on chairs and shout corporate principles to each other -- had run into criticism over an $80 million pay package he took while E*Trade was losing millions. Cotsakos was forced to return some $21 million. E*Trade's stock, worth about $26 a share when Caplan sold his bank, had shrunk to just a few dollars, hitting Caplan and fellow TeleBank investors in the wallet. "I felt like a passenger on the Hindenburg," recalls Thomas C. Danziger, a New York lawyer and longtime friend of Caplan's who says his investment had swelled to eight figures only to plunge to six figures.

Once in charge, Caplan and his colleagues focused on exploiting E*Trade's bank, where the company had a clear edge over rivals Charles Schwab Corp. (SCH) and Ameritrade Inc. (AMTD). By offering banking products such as checking accounts and loans at bargain rates to trading customers, E*Trade has built the nation's eighth-largest thrift. It has become a big profit center, too, accounting for nearly 40% of revenues and 48% of profits. Overall, the company boasts some 632,000 bank accounts and 2.9 million active brokerage accounts, up from 170,000 bank accounts and 2.4 million brokerage accounts in early 2000.

BUYING A RIVAL?

After stripping E*Trade down to its basics, Caplan is now searching for growth. He has reorganized his management team around retail and institutional customers, hoping to appeal to hedge funds and institutional traders as well as individual investors. He's also interested in acquisitions. Last year, Caplan explored buying rival TD Waterhouse Investor Services Inc. -- until he realized that a stock deal would give the firm's parent, Toronto-Dominion Bank, too big a stake in E*Trade. He is currently sizing up Ameritrade, whose $5.3 billion market capitalization slightly tops E*Trade's. "We've got the infrastructure," says Caplan. "We've got our costs down. Now let's complete the creation of the franchise." For its part, the relentlessly acquisitive Ameritrade is open to deals of all sorts, its executives say. Looking at the changes Caplan has made, Ameritrade CEO Joseph H. Moglia says: "Mitch has done an excellent job."

Much as Caplan's fixes have helped, he's facing tougher competition than ever. On Jan. 3, Scottrade Inc., the No. 6 online broker -- and the cheapest of the major players -- cut its fees. Charles R. Schwab, back in charge of his old company, is also dropping prices, although Caplan argues that Schwab is only playing catch-up. Schwab, which recently crept ahead of Ameritrade to become the online-trading leader, is ramping up its own bank, and Ameritrade is planning to launch one, too. Schwab is "a killer company," admits Caplan, but he's confident that E*Trade's customers will stay loyal.

If it would help shareholders, Caplan says he would sell E*Trade. Still, there's little doubt he would rather come out on top. "Mitch always wants to win," says Arlen W. Gelbard, Caplan's former college roommate, now president of E*Trade's bank. Indeed, the longtime tennis buddies rarely keep score on the court anymore to keep the games from getting too competitive. But investors are keeping score -- and so far, Caplan is winning.

By Joseph Weber in Chicago


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