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Online Extra: E*Trade's Captain of Discipline


E*Trade Financial (ET) once looked like just another dot-com flameout. Its stock, at one time as high as $60 a share, plunged below $3 two years ago. E*trade piled up some $428 million in red ink in the two years after the Net bubble burst. And it suffered through a management crisis in 2003.

But the online broker is thriving again. As lawyer-entrepreneur turned CEO Mitchell H. Caplan enters his third year at the helm, the $1.5 billion-a-year outfit is well in the black. Investors have bid its stock up to about $14 a share. And Caplan is shopping for merger partners. He recently met in his Arlington (Va.) office with BusinessWeek Chicago Bureau Manager Joseph Weber. Here are edited excerpts of their conversation:

Q: You're not a Silicon Valley person, but an attorney by training and an entrepreneur. You came in when E*Trade acquired your company. Tell me about your progression.

A: I graduated from Brandeis in 1979, went to business school at Emory. And my father was adamant that I go to law school. He was a real estate developer, but he had never gone to college. Profession was really important.

In hindsight, it was a brilliant sort of demand/advice. Business school taught me two things. One is, I had gone to Brandeis -- you could not ask for a more basically diverse liberal arts background. So I probably left -- interestingly as the CEO now of a company in the financial-services sector -- with an extraordinary fear of numbers, having graduated from Brandeis [and majoring in] history. One thing business school did is it taught me to love numbers [and to think] about things like return on assets, return on equity on cash. When you say I'm not from Silicon Valley, you're so right.

Q: Expand on that.

A: During the bubble, anything that had Internet attached to it, connected to it, appendaged in any way, suddenly became the cure-all for everything, including cancer and the common cold. I'm surprised that funeral parlors and funeral-service directors didn't suddenly decide how they could do it over the Internet to get a higher multiple.

Underneath all the hype, E*Trade had a hell of a business model. It was founded on the very solid belief that if you used technology to disintermediate through this alternative distribution channel of the Internet, and you passed some of that value back to consumers, you could pass a lot of value back to shareholders.

Q: So you went to law school and then practiced law?

A: I did. I got an offer at a firm in New York, Shearman & Sterling. I worked at Shearman for five years. I did real estate and banking. I had this crazy idea with a partner to buy a bank. It was pre-Internet, but the philosophy was, "What if we buy a bank, and we shut down all the branches, and we create this concept of a branchless banking environment?"

The business model is literally as simple as saying, "We're going to run our costs at 60% to 70% less" -- so you'll run somewhere between 30% and 40% of the costs of a traditional bricks-and-mortar bank. And you take that cost saving and you pass it back in the form of a better rate for FDIC-insured, commoditized banking products -- CDs, money-market, checking.

It was telephone-based. And access to cash was an ATM network.

Q: So did you acquire an existing bank?

A: We did [in 1989]. We acquired Metropolitan Bank for Savings, and when we acquired it, it had a whopping $30 million in deposits and about $50 million in assets.

Q: That grew into TeleBank, which was acquired by E*Trade?

A: Yup. And so we've grown it. Assets now are in the neighborhood of $25 billion.

Q: That's the eighth-largest thrift?

A: It's amazing. Deposits are somewhere in the neighborhood of $15 billion.

Q: Tell me about how you came to be CEO.

A: I had been CEO of TeleBank. It had been quite successful in terms of creation of shareholder value and in terms of the traditional measurements -- growth in revenue, growth in earnings, and [return on equity] -- all the sort of boring stuff that's important when you'e building a real franchise.

Timing is everything. Within six months of closing, we peaked in terms of retail trading volume. It was 2000. We closed in January of 2000. By April or May, you were through the peak, you were seeing declining revenues, and the bank became more significant. It could deliver true economics to the bottom line. So I started as the chief banking officer, and then I ended up running North America and having [profit and loss] responsibility for all of North America for E*Trade Financial, which was all of the businesses. Then I became president and chief operating officer.

Q: You saw the stock drop, you watched retail trading plunge, new accounts plunge, the disillusionment with the Internet bubble. You saw a lot of Internet companies die. Were you scratching your head and saying, what the heck am I doing here?

A: Never once. I absolutely believed that we had a sustainable business model. I knew that underneath all the hype of the Internet that we had businesses that could generate real revenue and were generating real revenue.

Q: The market wasn't believing.

A: A lot of that was everything else that was going on in the marketplace. There was a war and terrorism. And then as we got through that, we had an issue with our CEO -- the compensation issue.

Q: How would you say your style contrasts with the former CEOs, and how does that reflect the difference in E*Trade today vs. five years ago?

A: I absolutely believe in a team approach. I'm also much more of a consensus-builder. I very much believe that we have an obligation to think first and foremost about shareholder value. But I'm adamant, and not only am I adamant, as a team we're all adamant and disciplined about thinking about financial returns.

Q: Did you think the business would go away at some points, when the stock was under $3?

A: I never worried about the stock price as much as I worried about the fundamentals of the business. I believed that if you took care of the fundamentals, the stock price would improve.

Q: The Street expects consolidation. Are you open to acquisitions?

A: Absolutely.

Q: Are you open to selling out?

A: I would do absolutely, positively anything that I felt was the right thing to do for shareholders. And I can tell you I can back it up because I sold TeleBank.

Q: You've been a seller.

A: And I've been a buyer.

Q: Your preference would be to acquire Ameritrade (AMTD)?

A: Yeah. I think that's right. But you want to know the truth. I actually believe this is what makes businesses successful. You don't acquire them. They don't acquire you. You really bring it together, even if you have disparate sizes.

At the end of the day, this management team owns an awful lot of shares in E*Trade, so we're pretty motivated to do the right thing for shareholders because we're not insignificant shareholders.


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