Net brokerage war escalates

E*Trade gets a $400 million investment from Softbank, while Charles Schwab unveils a redesigned site.

4 min read
The online brokerage battle is heating up, with E*Trade getting a $400 million investment from Softbank and Charles Schwab unveiling a redesigned Web site.

Softbank took a 27.2 percent stake in the Net brokerage Friday, purchasing 15 million newly issued shares, according to E*Trade spokesman Tim Ryan.

E*Trade shares closed today up 10 points, or more than 40 percent, finishing at 34.5. The stock has traded as high as 47.875 and as low as 17.375 in the past 52 weeks.

Under terms of the agreement, Softbank will hold its shares at least two years and will not buy any additional shares for at least five years.

E*Trade plans to use some of the funds to promote its upcoming financial portal site, dubbed Destination E*Trade. "A significant portion" will go toward more acquisitions, the firm said. E*Trade bought financial firm ShareData earlier this month, and teamed with Softbank last week to develop E*Trade Korea.

Rival Schwab's announcement comes after the firm had to delay its plan to offer third-party analyst reports on its Web site earlier this year following protests from some of the largest and most entrenched full-service investment banking firms, including Merrill Lynch and PaineWebber. Schwab unveiled the plan in January and then backed away only days later when First Call, which was slated to provide the research reports, shuddered at Wall Street's response.

Web design firm Razorfish revamped the site, which Schwab hopes will be more intuitive and "put more of the information investors need at their fingertips." Easy-to-use navigation and customizable account views are part of the new look.

"The only component not in the Analyst Center are specific research reports from investment banks," said Tom Taggart, a Schwab spokesman. "We have every intention of adding third-party research by the end of the year."

The company declined to disclose which investment banks might be involved, citing ongoing negotiations. But Taggart said an announcement is expected this fall.

Despite expanding its online services, Schwab is taking a divergent approach from the strictly online brokerages, including E*Trade, which plans to "go portal" with Destination E*Trade. E*Trade has unveiled plans to offer chat on the financial services site. It has already rolled out some Destination E*Trade features on its proprietary service for customers, but plans to launch the updated service on its public site have been postponed until September, the firm said today.

Schwab is able to leverage its 280 branch offices and telephone services in addition to its growing online presence. The firm said online accounts are up to 1.8 million from 1.2 million at the beginning of the year.

"I know some other online brokerages want to offer car loans, mortgages, and everything else you can think of through one site," Taggart said. "I don't know if people can be all things to all people.

"Sometimes things come up with my money and I need to visit a branch. We just don't see that changing any time soon," he added.

But some analysts have said the portal-esque approach is a smart one for the brokerages that exist solely online.

Kathleen Smith, a portfolio manager with Renaissance Capital's IPO Fund, said she sees room for about five quality brokerages in the online marketplace--most likely Schwab, E*Trade, Ameritrade, Fidelity, and Donaldson, Lufkin, & Jenrette, for example--but she describes Schwab's traditional branch offices as "baggage."

"I think the most aggressive [brokerages] will be all online," Smith said. "The online brokerage business is still relatively new, but I think the real question is whether the full-service brokerages will survive."

Meanwhile, the escalating valuation of Internet stocks--especially portals such as Yahoo, Excite, and Infoseek--has extended to online brokerages in recent weeks. In what seems like a natural fit, investors who make trades online are now investing in the Internet brokerages themselves.

Stock in Schwab, E*Trade, and Ameritrade has jumped significantly in recent weeks. Ameritrade is up more than 27 percent since June 25, closing Friday at 38.9375. Schwab shares closed Friday at 36.3125, an increase of more than 16 percent since June 25.

E*Trade stock prices have climbed steadily since June 1.

Renaissance's Smith said the online brokerages have been undervalued relative to the other Internet stocks.

"People have forgotten that these are good Internet stocks," Smith said, describing online brokerages as the "Rodney Dangerfields" of tech issues. "Certainly the full-service brokers don't want to give [online brokerages] any respect because they are direct competitors."

Reuters contributed to this report.