E-Trade Case Study

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Customers

Product Services

Markets

Concerns for Survival, Growths, Profitability

Concerns for public image

Concerns for employees

Self Concept

Technology

Philosophy

Yes

Yes

Yes

No

No

No

No

Yes

No

E-Trade Mission Statement (improved)

E-Trade is one of global leaders in online financial and investment services. We are committed to growing competition and are aiming at achieving the best results and becoming a leader in our market. Our main philosophy is to help our clients achieve their unique needs and interests. E-Trade's wide range of products and services includes portfolio tracking, free real-time quotes, market news, and research available 24 hours a day, seven days a week. Our performance is exceptionally ethical. Moreover, we make efforts to improve the quality of life for the inhabitants of countries we operate in. Customers have a unique possibility to access their E-Trade accounts virtually any time anywhere around the world.

2. SWOT

STRENGTHS - S

Over 3.5 million clients

Strong positions in the market

High brand recognition

Continuous innovations

Wide range of services

Strong operating record

Improved management of costs

Expansion into new businesses

3300 employees

WEAKNESSES - W

Loss of some foreign markets

Decline in operating income in core activities

Weak net revenue growth

Decrease of interest income

OPPORTUNITIES - O

Possible acquisition of an online brokerage company

Possibility to open new overseas brick and mortar banks or brokerage offices

Increase the number of ATMs throughout the world

Outsourcing of technology development

Market expansion options

SO STRATEGIES

Buy Ameritrade (S2, O1)

Outsource IT specialists in India or Estonia (S4, S7, O4)

WO STRATEGIES

To set up new brokerage offices in UK, Germany, Denmark, New Zealand, Sweden (W1, O2)

THREATS - T

Recession in US economy

Tough competition

Threat of global economic slowdown

Geopolitical fears

Losing of investors confidence

ST STRATEGIES

Attract more clients by innovative and up-to-date services (S5, S4, T2)

WT STRATEGIES

To streamline the processes in order to minimise costs (W2, W4, T1, T3, T4)

To enter new markets (W1, T1)

3. Improvements in Organisational Structure

The organizational structure of E-Trade is quite effective and efficient, first of all it follows the rule of flat organizational structure, secondly almost all chief executives are equal and thus report to one person only.

However the structure could be improved by taking the two 3rd line managers out and "promoting" them to second line management, that way the structure will be flat to its fullest meaning.

This means that the "Chain of Command" from top to bottom is short and the "span of control is wide".

The structure will look as follows:

Advantages of flat Organisations

Disadvantages of flat Organisations

More/Greater communication between management and workers.

Workers may have more than one manager/boss.

Better team sprit.

May limit/hinder the growth of the organisation.

Less bureaucracy and easier decision making.

Structure limited to small organisations such as partnerships, co-operatives and some private limited companies.

Fewer levels of management which includes benefits such as lower costs as managers are generally paid more than worker.

Function of each department/person could be blurred and merge into the job roles of others.

Still the advantages are of greater importance so it would be quite reasonable for the company to adopt such a structure.

4. Acquisition Candidates

As it is stated in E-Trade company's plans for the coming years, one of the main goals, along with acquiring ATMs and opening brick & mortar banks/brokerage offices in different countries, is the possibility of acquiring one or two competing companies (dealing with online brokerage) in order to gain economies of scale and expand market share.

Clearly, E-Trade could be interested mostly in large market players, which possess a considerable market share and have a strong competing power. However, they should be affordable for E-Trade in terms of their prices.

First of all, the present key financial figures of E-Trade itself should be defined in order to assess the affordability of the acquisition candidates. Here are the relevant figures from the inaudited Statement of Financial conditions of June 30, 2007:

Cash & Cash equivalents - 78,533,000 $

Total assets - 7,697,077,000 $ (mostly composed of receivables)

S.H.E. - 772,868,000 $

There exists a variety of major brokerage companies (mostly US and UK-based). Their classification differs from source to source, but generally they are divided into 3 classes:

Premium Brokers

Full-service brokers

Discount brokers.

There also exist considerable deviations in allocating major market players into these groups. E.g., in different ratings, E-Trade itself can be found either amongst Premium or Discount brokers. For instance, "SmartMoney" provides the following rankings:

Broker

Commission ($)

Interest rate on cash ($)

1

E*Trade

9.99

1

2

Fidelity

10.95

3.58

3

Charles Schwab

12.95

0.96

4

Bank of America

5

4.59

5

TD Ameritrade

9.99

1.65

6

WellsTrade

Free

2

7

Vanguard

25

5.11

Broker

Commission ($)

Interest rate on cash ($)

1

TradeKing

4.95

1

2

Scottrade

7

3.25

3

Firstrade

6.95

4.39

4

OptionsXpress

14.95

4.09

5

Muriel Siebert

14.95

4.47

6

WallStreet*E

9.99

4.49

7

SogoInvest

3

3

At a first glance, the following candidates could be selected for a possible acquisition bid:

TD Ameritrade - This Company has been suggested for consideration in the case and in suits to the acquisition requirements. Ranked 1st in "Barron's" online brokers' rating.

Charles Schwab - This Company has strong market positions and long experience. Moreover, the early E-Trade started its activities by providing online quote and trading services to Charles Schwab (along with Fidelity and Quick & Reilly).

Now the worth of these companies should be defined. Unfortunately, valuation is an exact science and it is almost impossible to define a one particular right method of valuation. Basically, they can be based on 3 factors:

what a firm owns

what a firm earns

what a firm will bring in the market (in future)

Therefore, different methods should be applied with a subsequent calculation of an average value. Besides manually calculated figures, the Bloomberg's "Enterprise Value" estimation will be used.

Cash Value analyses for TD Ameritrade and Charles Schwab.

TD Ameritrade

SHE + goodwill = $ 407,939,000

Net Income x 5 = $ 132,838,000 x 5 = $ 664,195,000

Share price = $ 18.62/EPS = $ 17.56 x Net income = $ 2,333,437,321

Shares outstanding x Share price = 595,937M x Share price = $ 11,096,346,000

Bloomberg Company's value estimate = $ 2,060,904,000

Average estimated value: $ 3,312,564,264

Charles Schwab

SHE + goodwill = $ 564,000,000

Net Income x 5 = 1,122,000,000 x 5 = $ 5,610,000,000

Share price = $ 22.37/EPS = $ 26.63 x Net Income = $ 25,390,860,000

Shares outstanding x Share price = 1,152,088M x Share price = $ 25,772,208,000

Bloomberg Company's value estimate = $ 2,513,320,000

Average estimated value: $ 11,970,077,600

Right away, it becomes clear, that E-Trade cannot afford acquiring Charles Schwab, at least because its value 1.5 times exceed E-Trade's total assets. Such an incredible value was mainly achieved by an extremely successful previous year's performance resulting in a Net Income of $ 1,122,000,000. But anyway, it appears that Charles Schwab would be an unaffordable deal in any case. The company is considerably stronger and bigger than E-Trade.

Conversely, acquiring TD Ameritrade appears to be quite a possible and reasonable deal. The company is almost as big as E-Trade and, assuming the usage of substantial leverage, still affordable to E-Trade. However, it should be noticed that the only factor that has fuelled the price that much is the share price. Hence, the price still can be largely negotiated. All the other indicators also state that this company is one if the best suitable for meeting E-Trade bold expansion and development plans.

5. Expansion to New Countries

According to the case, E-Trade is present in 11 countries; namely - the USA, Germany, Australia, Canada, New Zealand, Denmark, Hong Kong, Japan, Korea, Sweden the UK and Israel. The further expansion should be in line with the plans of the company towards creating a new global trading system which would permit investors to purchase and sell stocks in several countries with account balances being denominated in local currencies. In addition, the target countries shall be assessed by overall state of economy in a country, the business environment, the strength of financial and banking sector, the popularity and potential of on-line brokerage services and the investing power.

Countries to be considered:

South America

Brazil

GDP (PPP and Nominal) is the highest in Latin America

Has been expanding its presence in international financial and commodities markets

Has the ninth largest economy in the world by purchasing power parity (PPP) and tenth largest at market exchange rates

Banking sector amounted to as much as 16% of GDP, and has attracted foreign financial institutions

Europe

Finland

Highly industrialised, free-market economy with a per capita output equal to that of other western economies

The most competitive country in the world for three consecutive years ( proclaimed by The World Economic Forum)

Austria

One of the 10 richest countries in the world in terms of GDP per capita

Has been attracting huge amounts of FDI for decades

Fourth richest country in the EU

Switzerland

Ranked as one of the most powerful economies in the world

Banking sector is one of the most important industries

One of the world's most stable economies.

A safe haven for investors, creating an economy that is increasingly dependent on a steady tide of FDI

Luxembourg

Services, especially banking and other financial exports, account for the majority of economic output

Highest GDP per capita in the world

Attracts capital from other countries as the costs of investing through Luxembourg are low

Belgium

One of the world's ten largest trading nations.

Has been attracting tremendous amounts of FDI

The Netherlands

16th largest economy in the world

Has a relatively low GINI coefficient of 0.326

Norway

Second highest GDP per-capita and third highest GDP (PPP) per-capita in the world

Robust growth since the start of the industrial era

Italy

Seventh largest economy in the world in 2006, fourth largest in Europe

Developed finance and banking sector

Spain

The ninth largest economy worldwide and the fifth largest in Europe

The economy has been regarded lately as one of the most dynamic within the EU, attracting significant amounts of FDI

Asia

Singapore

Highly developed market-based economy

One of the Four Asian Tigers.

World's fourth largest foreign exchange trading centre after London, New York City and Tokyo

The most business-friendly economy in the world

The government promotes high levels of savings and investment through a mandatory savings scheme

Indonesia

Significant amounts of FDI have been flowing in for several years

Has been listed in "Next Eleven" economies - having promising outlooks for investment and future growth.

Philippines

Has been listed in "Next Eleven" economies - having promising outlooks for investment and future growth.

The fastest-growing economy in Southeast Asia

Malaysia

Imitates the development of Asian Tigers

FDI has been playing a significant role in the transformation of Malaysia's economy

At various times the KLSE was the most active exchange in the world, with trading volume exceeding even the NYSE

6.1. BCG Matrix

Criteria

Significance for the market (1=important; 2=very important; 3=the most important)

In comparison with the competition

(1-3=weak; 4-6=average; 7-9=strong)

Weighty value

Market share

3

7

21

Know-how

2

3

6

Distribution network

2

7

14

Financial Performance

2

5

10

Quality

3

7

21

Promotion Effectiveness

2

5

10

Σ

14

82

82/14=5.8

Market attractiveness

Criteria

Significance for the company (1=important; 2=very important; 3=the most important)

Attractiveness

(1-3=weak; 4-6=average; 7-9=strong)

Weighty value

Market growth rate

3

1

3

Overall market size

2

4

Competitive Intensity*

3

3

9

Substitute Impact*

3

3

9

Price Competition*

2

8

16

Historical profit margin

2

5

10

Σ

15

55

55/15=3.7

* - estimated visa versa - the stronger factor, the weaker attractiveness

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