E-Trade Snaps Up Key Rival in $700M Deal

The discount brokerage industry shrunk further yesterday with the announcement that online giant E-Trade Financial would acquire rival HarrisDirect in a $700 million deal.

"The decision to sell HarrisDirect followed an assessment of HarrisDirect's ability to compete in a changing landscape," said Tony Compor, president and CEO of Montreal-based BMO Financial, HarrisDirect's parent company, in a statement. "Given the additional amount of capital that would have been required to grow the business and remain competitive in the current environment of consolidation, we concluded that HarrisDirect would be more valuable to another participant in the online brokerage industry."

The discount brokerage industry has been slumping due to dramatically fewer transactions in the wake of the dot-com bubble burst five years ago and the prolonged bear market that ensued. It's led to consolidation fever in the sector, witnessed most recently by Ameritrade's $2.9 billion acquisition of rival brokerage TD Waterhouse from Canada's Toronto-Dominion Bank. Ameritrade executed its acquisition shortly after it rebuked a takeover bid by E-Trade. San Francisco-based Charles Schwab has been squashing recent rumors that it might be the next focus of a takeover.

With acquisition of HarrisDirect, however, E-Trade Chief Executive Mitchell Caplan said in a conference call that the company is gaining "a sophisticated and affluent customer base with growing levels of investable assets."

Caplan said the HarrisDirect customer base numbers 430,000 and that the average account balance is over $70,000. HarrisDirect executes 15,000 trades daily at about $7.95 per trade. E-Trade will also gain $32 billion in assets, $1 billion in margin debt and $5 billion in cash, Caplan said.

The deal should further cement E-Trade's dominance in the online sector. In 2004, its annual earnings doubled to $389.1 million, largely on the strength of a 6% surge in revenue.