E*Trade Financial Corp.'s (NASDAQ:ETFC) $1.8 billion purchase of Internet bank Telebanc Financial Corp. in 2000 raised some eyebrows for the price it paid for the little known target that it would later use to begin its foray into the mortgage business.
Nine years and billions of dollars in losses later, E*Trade is likely regretting its move into mortgages, especially since it reported more bloodletting with a loss of 41 cents per share, or $232.7 million, in the first quarter. The loss was the seventh consecutive money-losing quarter for E*Trade.
Now, the Office of Thrift Supervision has told the company to "quickly" raise new capital for its bank and cut the debt of its holding company, Reuters reported. Will the company consider putting itself up for sale as an option to survive?
This wouldn't be the first time E*Trade would be flirting with going on the auction block. But this time around, its circumstances seem more dire. The economy has reduced the number of potential buyers, and more importantly E*Trade's financial picture hasn't improved. Corporate Dealmaker reported in March 2008 that then-newly elected CEO Donald Layton told The Wall Street Journal that he would certainly entertain a sale if it made sense for the shareholders. Citadel Investment Group LLC eventually rescued E*Trade with a $2.5 billion cash infusion, crushing rumors that TDAmeritrade Holding Corp. (NASDAQ:AMTD), Citigroup Inc. (NYSE:C), Wells Fargo & Co. (NYSE:WFC) or Bank of America Corp. (NYSE:BAC) would swoop in on the online brokerage firm.
What does E*Trade have to offer? The company's core brokerage business seems healthy, but its Achilles heel is its mortgage business, where delinquent loans totaled $2.24 billion, up 13% from the previous quarter.
Overall, the future for E*Trade looks bleak. E*Trade Bank's Tier 1 capital ratio, a measure of capital strength, was
5.63% at quarter's end, down from 6.29% in the previous period. A well capitalized firm needs at least 6%. Meanwhile, it's stock has languished, dropping as low as 59 cents a share in the last year (shares have since rebounded).
Besides selling itself, the company could still raise capital if Uncle Sam gives a green-light on its application for $800 million in relief under the Troubled Asset Relief Program. However, the application was made back in November. But if that doesn't happen, E*Trade may try to dive into the onerous task of either tapping into the debt markets or even issuing more stock to stay afloat. E*Trade's escape scenarios seem precarious at best, but that's what happens when a billion-dollar deal based on a speculative bubble blows up. - Gerald Magpily
Dealscape: Bettinger is new Schwab CEO
Deal Pipeline: E*Trade, possibly for sale, makes Layton CEO (subscription required)
Deal Pipeline: Weaving a financial web (subscription required)
Continue reading below
Thanks for sharing. It is useful for me.