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E-Trade buys BrownCo from JPMorgan

NEW YORK - E-Trade Financial Corp. on Thursday said it will buy BrownCo from JPMorgan Chase & Co. for $1.6-billion, a move that intensifies its rivalry with Ameritrade Holding Corp. for dominance in the online brokerage market.

The acquisition comes amid rapid industry consolidation as competitors slash fees in an effort to win customers and boost trading volumes, which have declined heavily since the dot-com bubble burst four years ago. This past summer, E-Trade and Ameritrade announced plans to take over smaller firms.

Shares of E-Trade rose 89 cents, or 5.5 percent, to close at $17.22 on the New York Stock Exchange.

The stock has traded in a 52-week range between $10.53 and $17.49.

Jarrett Lilien, E-Trade's president and chief operating officer, said adding BrownCo's 200,000 clients - whose average account balance of more than $145,000 is the second highest in the sector - will improve the quality of its customer accounts.

"We also believe that they are more open to taking other products, and we have those other products, particularly the cash products on the banking side," he said.

While BrownCo has a relatively small account base, E-Trade gains a "much-needed" customer segment of active traders with high cash balances, said Lauren Bender, senior analyst at financial consulting group Celent LLC. BrownCo's clients trade an average of 36 times a year, about six times as frequently as the current E-Trade customer.

Coupled with its August purchase of Harrisdirect from BMO Financial Group for $700-million, E-Trade also stands to see expanding profit from growing trading volume as its system becomes more efficient, Bender said.

"We estimate that the additional trading volume from Harrisdirect and BrownCo will reduce our break-even point to 15,000 trades per day from our current standalone level of approximately 45,000 trades per day," Mitchell Caplan, E-Trade's chief executive, told analysts on a conference call.

The company said it will average almost 160,000 trades per day after the deal closes. This month, E-Trade reported August volume of 121,086 trades per day, down 3.7 percent from July, while Ameritrade's average daily volume grew slightly more than 1 percent to 146,000.

Harrisdirect and BrownCo's combined 630,000 accounts bring E-Trade's total to 4.3-million accounts, with about $160-million in assets, $27-billion in cash and deposits and double its margin balance to more than $6-billion.

Margin balance refers to the amount of money the company has loaned its customers to make trades.

Job cuts are expected at E-Trade and BrownCo, but while Lilien did not specify how many, he said about a quarter of the $91-million in projected cost savings will come from salaries. Restructuring activities should cost about $60-million in 2006, E-Trade said.

[Last modified September 30, 2005, 01:35:17]