Ameritrade Stays Its Rocky Course

SAN FRANCISCO (06/05/2000) - As trading volume goes, so do the stock prices of online brokerages. That's particularly true in the case of Ameritrade Inc., which relies on trade commissions and fees for two-thirds of its revenues.

It's the customers of these online brokerages who help drive up their stock prices during healthy market periods, so it should come as no surprise that the recent market downturn has hurt the valuations of all online brokerages.

In an attempt to appease skittish investors, some of Ameritrade's competitors are scrambling to enter new markets in order to decrease reliance on trading volumes. Last week, E-Trade announced a venture with Ernst & Young to provide financial-planning guidance for its brokerage customers.

But Ameritrade is staying its hazardous course, dismissing competitors' everything-for-everyone business models as broad and shallow. Just as American Express, CitiGroup and others have failed to emerge as successful one-stop shops, so will E-Trade and others that attempt to replicate the model online, said Ameritrade CEO Tom Lewis.

"We absolutely believe in diversifying revenue," adds Lewis, who took the reins as CEO when co-CEO Joe Ricketts retired two weeks ago. "We just don't believe in diversifying our business. American consumers are just not interested in buying all financial products under one brand name."

Ameritrade, based in Omaha, Neb., which has built its franchise on bare-bones investment services and $8 trades, is instead offering customers services through partnerships. In May, the brokerage linked up with MBNA to offer cobranded credit cards to its customers. The company also is in talks with providers of banking, mortgage, insurance and other services to provide that one-stop shop through relationships with third parties, according to Lewis.

In addition, the company will fund OnMoney, a financial aggregation startup that it launched in January. At the time, OnMoney executives said third-party financing was just around the corner and that a spinoff from Ameritrade was imminent. The company is still in the process of securing that financing, said Jim Blumenthal, OnMoney's chief marketing officer. Lewis now says OnMoney will be spun off by the end of the year.

Last quarter, Ameritrade financed its growth through a credit facility. Its most recent filing with the Securities and Exchange Commission revealed that it's considering liquidating part or all of its equity ownership in trading firm Knight/Trimark, a stake that was valued at $403 million at the end of March, to provide working capital if needed.

"I see capital [needs] being more of an issue for Ameritrade than for E-Trade," says Chase H&Q analyst Greg Smith. "I think it's going to be a few more months before this is over, and anybody who needs capital could be in trouble."

The drop in online brokers' valuations has reignited expectations of consolidation. Without strong-stock currency and little cash, Ameritrade would more likely emerge as a seller than a buyer. But company execs firmly dismiss earlier reports that Ricketts was exploring opportunities to sell.

"Everyone is looking at opportunities," says Lehman analyst Richard Repetto.

"Consolidation is going to be here. It is just a matter of time."

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