Wow, if the indications on this board are any reflection of what’s happening in the boardroom of Etrade, then Citadel’s plan is truly working. Here’s the disclosure, I’m long with about 16,200 shares at an average cost of $4.19. I added 6,600 shares today at $3.59. I cannot believe the hysteria and ridiculousness infecting this board and I for one am sick of conspiracy theories that just don’s make any sense, so I have endeavored to lay it out as best I can, knowing all the facts I have available. Before I begin writing the rest of this analysis I want to state one caveat: I am fine with holding this stock for two years and watching Etrade compete again, fine with suffering through the bloody price wars, fine with all of that. I did not initially buy Etrade for the merger/buyout. With that said, here it goes sorry for the length.
I am now convinced that a merger/buy out is coming and coming soon. In fact, I added $24,000 worth of shares today because I am so convinced. It is all a matter of valuation, as Joe Moglia so eloquently stated ?what to do with the HELOCs, and I think that is being taken care of and may already be done ?or maybe they are waiting for the results of the Fed auction as one more data point, as Snake referenced. The merger will likely be with AMTD, because I don’s see how they could not do this deal and Schwab has SIV problems of its own. Jana Partners and S.A.C. Capitol Advisers sent two letters trying to force a merger this summer. And guess who is now calling the shots behind Etrade, Citadel, their hedgie buddy.
Let’s look at what we do know:
First, the stock price has been walked down by MMs and the big boys ?there is serious manipulation going on.
Second, Max Pain says that at $4 or $5 the options expire worthless.
Third, we have heard NOTHING from anyone other than the standard crap that is a 2.55 billion dollar vote of confidence.? In fact, can anyone cite me an interview by ANYONE from Citadel or Etrade after the infusion ?in December ?that says anything other than a bland statement that we think it was a broken balance sheet, not a broken business ?and anything in the last two weeks at all?? No, it is radio silence, as the stock price has continued to fall fairly significantly. Moreover, three weeks ago there were calls going out that Etrade was headed towards bankruptcy and the stock fell more than 50% IN ONE DAY on November 12th. This is not a huge writedown, this is the survival of the company. Does anyone really think that if C or MER or any big bank/financial services firm suffered from awful press saying they could be going bankrupt anytime that there wouldn’t be a full out media blitz responding to these allegations and that there was no veracity we’re back and fighting. Wouldn’t you expect to see Etrade management on CNBC arguing that they’re back and they’re becoming more and more competitive, etc. There has been no guidance, nothing. And I’ll flat out say it right now, if they fail to appoint a CEO by New Years and the stock continues to suffer, and no further guidance is provided, then the board of directors is flat out violating their fiduciary duties, as well as management, and there is no other way to put it.
Fourth, Jana Partners and S.A.C. Capitol Advisers practically tried to force a merger between these two.
Fifth, Moglia wants it and wants it bad. This would make him a big man on campus and the benefits to AMTD of doing the deal are enormous, from size, international exposure, synergy of technologies and Etrade’s presumed superior trading platform, banking and asset gathering capabilities, etc., etc., etc. Put aside the inherent and enterprise value of Etrade as a company, what Etrade would bring to AMTD is worth $15-18 per share at least. Of course, I am not saying that is what the price will be, but that is what it is worth to AMTD at a minimum.
Sixth, Etrade is not a company that makes widgets. You can’t force it to go bankrupt and split up the assets at fire sales like it’s BlueStar Airlines or something. That’s because the damn assets, upon catching a serious whiff of bankruptcy or that something is wrong, are all headed for the door. Etrade does not make widgets, it deals in customer assets that are moveable at the whims of those customers. Thus, the stock price cannot fall below $3. For the love of God, upon the hint of a bankruptcy the stock went to $3.49. We are now at $3.60. People, the deal was not that dilutive. When Etrade started in 1996 the price was at $2.69. I’ll like to think they have built up some value over the last 10 years, don’t you? The current stock price is ridiculous and a result of manipulation.
Seventh, Mitch Caplan sold 300,000 shares this week and he still holds 1.3 million shares, to my knowledge. I don’t know why this is, I’m sure there are many theories, but he’s still holding 1.3 million and if there is a buyout then I believe there is no worries because he would actually be foregoing profit. This is a wildcard on any buyout scenario and I would appreciate any legal insight on this. Regardless though, do you think as a member of the Board he would be out and about saying that he needed to pay off a mortgage or not to worry?etc., rather than just let it hang out there forever as another useful headline.
Eighth, the scary Citadel deal was not all that scary. Citadel’s notes don’t spring ahead until 2011 and the reason for that was to make sure Etrade didn’t take on any more senior, superior debt. Citadel did not use convertible bonds. The terms are onerous, 12.5% interest, 40% of order flow going to Citadel, 70 some million shares for basically nothing, etc., etc. But let’s look at what we also know about the deal: Etrade’s bank is forbidden from making high risk?loans, taking care of that, Etrade toxic debt is off the books, which means you can acquire her and say that you still have no exposure to the subprime market, ah, the buzz words. Citadel’s debt is structured so that it can be paid off at 101% upon the event of a buyout/merger, and Citadel had about 3% of the outstanding shares at a cost basis between $4.80-$5.20. That’s a good amount of money on the table. Moreover, Etrade does not give out monthly metrics anymore, I wonder whose idea that was? And if the common shareholder gets paid on their shares, then Citadel really gets paid on those same shares.
Ninth, and finally, the metrics are nowhere near as bad as everyone thought ?unless everyone went to Fidelity and Scottrade, which I highly doubt. This is HUGH for Etrade, even Moglia admitted that the bleeding had pretty much stopped. The numbers were much much better as far as attrition went than anyone thought, maybe it’s due to customer apathy, or maybe due to its superior trading platform, but Etrade retained a lot of accounts and assets. Now I know they say maybe it takes a couple of weeks to move everything, but what likely happened is assets moved for a bit, not accounts. And if Etrade is aggressively seeking to get the assets back, they should be pretty successful. In any event, the metrics for both AMTD and Schwab prove that there was no mass exodus from Etrade by its customers. That is big news.
Ok, now let’s look at the scenarios: Citadel is trying to use its Cayman connection to drive Etrade into dust and bankruptcy and screw over all us poor little bagholder shareholders. Pleazzz. First, this is a very public deal, Citadel’s name and face are all over it, does anyone really think that this is the reputation they want right before their plans to go public?? Secondly, they are an INSIDER people, with a seat on the board. Apart from the publicity of it, there are criminal and serious civil implications for trying something like that, especially with the spotlight on you. And do you think that Etrade stockholders may be one of the groups that could catch them doing that, hell, we are calling the stock manipulation that is going on right now, watching the biggies sell to each other, etc., etc. Now I know in most lawsuits the stockholders get jack, but just the problems this would create is ridiculous. Third, and this applies equally to the next scenario, Citadel is in kind of a weird position. They CAN’T FORCIBLY F*CK the stock price altogether without seriously risking the flight of a substantial number of customer assets. Etrade customers may have looked at one analyst’s numbers and said he was full of it, a 15% chance of bankruptcy, I’m not worried and I’m insured, etc. But if there is another highly-publicized question mark about Etrade’s stability, such as a stock price tanking into the 2s, you can bet that customers are really going to start paying attention and the exodus will begin. So what does Citadel have to gain by that, a bunch of computers and an Etrade financial sign. And Citadel’s debt has senior status, but it does not have priority over other debt ?the debt is equal, do you really think Citadel wants to fight it out in bankruptcy court with all the other senior creditors to recover its billions. For all these reasons, the nefarious scam to screw shareholders and drive E to bankruptcy does not make any sense.
Second, Citadel wants to take Etrade private. Ok, I really don’t care. But how do they do that. Are they going to screw over the shareholders by walking the price down continually, no, just for the reasons I gave above ?the exodus of customers would almost be guaranteed if the stock price is not shored up, insider problems, etc. Second, why would Citadel want to do that? A poster named Tom gave several compelling reasons, but there is also the problem of regulation and trying to take private a big bank with many customers. That is a headache that nobody would want I think. In any event though, if Citadel was to take it private they likely would have to offer $9-12 because you can be sure that AMTD would enter with a hostile offer if Citadel low-balled shareholders initially. Thus, with a widget company it would make sense to drive the stock as low as you could, through reporting bad metrics, data, etc. But here you really can’t drive it too low, because too low means scary instability and that’s where the assets of this company lie, which can be taken away in a heartbeat. Regardless, even assuming Citadel gives a lowball offer and AMTD does not come in, it’s got to be in the $6-7 range, there’s always a premium to assure the deal, period, end of story.
Third, Citadel loves Etrade with all its heart and wants to put da little alien back on its feet for the next two to three years during a grueling price war, more attrition, etc., etc. Again, this does not look too fantastic a possibility, or I guess I should say probability. Citadel flips things, they are in this for the buck, and have they ever struck gold here. The entire deal is structured to be flipped, just look at it. It screams buyout. Why in the hell would Citadel, with no guarantee of success, want to wait for 2-3 years to get paid by building up Etrade from the ashes of what it is now, go through the price wars and the attritions and the headaches of fighting Schwab, Fidelity and AMTD? I don’t know. But if that’s what they want to do, how do we lose, we should be back to $14-18 in a year, year and a half, there are ways to get rid or refinance the debt to Citadel. And with the HELOCs way overblown, Etrade’s earnings will look much better in the future.
And finally, we get to what is really happening, which in my view is the preparation for a buyout. Where is the real shake-out happening, it’s the board room of course, and just for a twofer, it’s the weak hand shareholders that are helping them keep the price down. It just makes too much sense. Radio silence from the company ?for all practical purposes, no CEO, radio silence from Citadel the last two weeks, Moglia all over the place with his comments, the stock manipulation, etc. Now who’s the last group that needs convincing ?Etrade’s board after all!! They are the ones who turned down Moglia before. And now, with the toxic portfolio off the books, there is no real impediment. The HELOCs, please, that is not an impediment, merely a question of valuation.? No other scenario makes sense here. And I believe in Occham’s razor ?the simplest solution is usually the right one. I welcome any comments and insight, but I am comfortable with a good long position at $4.19. I would add more, but I just can’t do it in good conscience. As for valuation, I think we will end up anywhere around $10-12, with $12 being the most likely figure. Thus, Ken can go to the board and say hey, this is around a 300% premium for current stock value, I mean they would almost be breaching their fiduciary duties if they didn’t take it for crying out loud. And thus, he can go to Moglia and say listen, you know what I’m doing, you’re getting this for a steal and at a bargain price, do you want to spend the $$$ on advertising or M&A for Pete抯 sake. And further, we need to do this in a friendly, merger way at a high enough price so that Schwab doesn’t start nosing around and perhaps f up the entire deal with a hostile offer. As Schwab is looking at it’s SIV portfolio, I think $12 per share should be just enough to keep them in their corner. And finally, can you imagine what kind of genius Kenny will be hailed as, such a huge profit in such a small amount of time. And here’s the kicker, what they probably prized all along, the order flow can remain with Citadel.
There we go, for Citadel the perfect deal. For Etrade longs and Etrade fans, kind of a sad and perhaps financially painful end. For AMTD, now it competes with the powerhouse online brokerages and really is an 800 lb gorilla in the market. That’s my 99 cents. Sorry for the length. I really do look forward to the comments on this one.
And finally, we get to what is really happening, which in my view is the preparation for a buyout. Where is the real shake-out happening, it?s the board room of course, and just for a twofer, it?s the weak hand shareholders that are helping them keep the price down. It just makes too much sense. Radio silence from the company ? for all practical purposes, no CEO, radio silence from Citadel the last two weeks, Moglia?s all over the place with his comments, the stock manipulation, etc. Now who?s the last group that needs convincing ? E?s board after all!! They are the ones who turned down Moglia before. And now, with the toxic portfolio off the books, there is no real impediment. The HELOCs, please, that is not an impediment, merely a ?question of valuation.? No other scenario makes sense here. And I believe in Occham?s razor ? the simplest solution is usually the right one. I welcome any comments and insight, but I am comfortable with a good long position at $4.19. I would add more, but I just can?t do it in good conscience. As for valuation, I think we will end up anywhere around $10-12, with $12 being the most likely figure. Thus, Ken can go to the board and say hey, this is around a 300% premium for current stock value, I mean they would almost be breaching their fiduciary duties if they didn?t take it for crying out loud. And thus, he can go to Moglia and say listen, you know what I?m doing, you?re getting this for a steal and at a bargain price, do you want to spend the $$$ on advertising or M&A for Pete?s sake. And further, we need to do this in a friendly, merger way at a high enough price so that Schwab doesn?t start nosing around and perhaps f up the entire deal with a hostile offer. As Schwab is looking at it?s SIV portfolio, I think $12 per share should be just enough to keep them in their corner. And finally, can you imagine what kind of genius Kenny will be hailed as, such a huge profit in such a small amount of time. And here?s the kicker, what they probably prized all along, the order flow can remain with Citadel.
There we go, for Citadel the perfect deal. For Etrade longs and Etrade fans, kind of a sad and perhaps financially painful end. For AMTD, now it competes with the powerhouse online brokerages and really is an 800 lb gorilla in the market. That?s my 99 cents. Sorry for the length. I really do look forward to the comments on this one.
great post
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