E-Trade Merger to Create 'One-Stop' Web Venture

E-Trade Group Inc. has found a merger match that will enable it to test on the Internet the "one-stop shop" proposition that has been hotly debated in conventional banking and financial services.

The on-line brokerage pioneer announced a definitive agreement Tuesday to buy Telebanc Financial Corp. of Arlington, Va., for $1.8 billion of stock. E-Trade said it will create the first "pure play," full-service banking and brokerage enterprise on the Internet.

The deal would add Telebanc's $2.6 billion of assets and 70,000 customers to E-Trade's one million customers with $21 billion in their accounts.

Rather than starting a depository institution from scratch, which probably would have had to be a thrift to get around bank-charter restrictions, E-Trade went after a thrift holding company that has established itself as a leading "virtual" financial institution.

The deposit-taking subsidiary, Telebank, does business mainly via the Internet and telephone, and boasts of being larger than "the next five pure-play Internet banks combined," a group that includes Net.Bank of Atlanta and Compubank of Houston.

The combination, said E-Trade chairman and chief executive officer Christos M. Cotsakos, would "challenge" the rest of the financial services industry. "We are inventing the future of on-line investing," he said.

"For the first time ever, on-line customers will have the opportunity to eliminate the need for multiple financial relationships," said Mitchell H. Caplan, president and CEO of Telebanc. "What we are creating with E-Trade is a revolutionary, one-stop personal financial services company on the Internet."

Ultimate company-name and branding decisions have not been made, officials said, noting that the deal was only six days in the making.

They are thus setting out, as have many others in the physical world, to prove the worth of a one-stop shop in financial services. Many past attempts fell short of expectations, as consumers habitually spread their business around. But companies from Citigroup on down are banking on a sea change, driven in part by the Internet and a possible fresh look at the concept of consumer convenience.

Analyst Stephen C. Franco of U.S. Bancorp Piper Jaffray in Minneapolis said Palo Alto, Calif.-based E-Trade is in a position to "define what the next-generation financial services company is going to look like."

Customers would have access to a full range of accounts and transactions on-line, including mutual funds, certificates of deposit, fixed-income securities, equity trades, and bill payments.

James Marks, who follows the electronic commerce market for Deutsche Bank Securities, was critical of the agreement, saying E-Trade is "massively overpaying" for a thrift company that has a return on equity below banking averages, despite its 132% yearly deposit growth and low-cost delivery strategy.

"I think E-Trade could have accomplished a lot of the same objectives and benefits at a much lower price," Mr. Marks said. The $93.45 that E- Trade agreed to pay for each Telebanc share amounted to 3.5 times book value.

Each share of Telebanc would be exchanged for 2.1 common shares of E- Trade, based on E-Trade's May 28 closing price of $44.50. Telebanc's stock rose 12% on Tuesday, to $74.50, while E-Trade's fell 12%, to $39.3125.

Despite the misgivings, Mr. Marks said E-Trade is pursuing a business model that banks "should be trying to figure out how to counter."

"It will not be just E-Trade," the New York-based analyst said. "It will be Charles Schwab, Ameritrade, Yahoo, and America Online. He added that banks should be "very concerned" about any nonbank entities that get involved in the bill payment business.

The merger agreement, expected to close later this year, would make Telebank, a federally chartered savings bank, a subsidiary of E-Trade Group.

Lawrence Greenberg, executive vice president at Telebanc, said, "We weren't really looking to sell ourselves." But the idea of linking investment and banking accounts presented itself as a "very strategic opportunity," he said.

"The time to market was just so critical," Kathy Levinson, president and chief operating officer of E-Trade, said of the decision to buy rather than build an on-line banking operation. "It really allowed us to jump-start into that space."

But Mr. Marks said E-Trade shareholders should be wary. The company "will be very closely regulated, the way all banks are, and that is not beneficial in an Internet environment where speed and flexibility" are at a premium.

Mr. Cotsakos is eyeing a long-term bonanza, saying "Internet banking is on the verge of explosive growth." He cited a projection that the number of on-line banking customers will grow to 15 million in 2002, from 4.5 million.

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