Citadel’s Squeeze Makes E-Trade Squeak

Online financial services provider E-Trade responded to pressure from stake holder Citadel Friday, days after the hedge fund sent a letter to the brokerage service demanding a review of strategies, including discussing a sale of the company.

Citadel requested a vote on a number of its proposals, such as declassifying the Board so that all members are elected annually, the removal of two independent directors and hiring an adviser to review strategic alternatives such as a sale.

Citadel suggested the vote be held at a special shareholder meeting.

E-Trade responded in a letter Friday, agreeing to hire Morgan Stanley to report to a special board committee to address the advantages of a sale at the 2012 shareholder meeting.

But I Won’t Do That

Any further action, however, was denied by the company.

E-Trade said on Friday it believes that it has already addressed the substance of Citadel’s proposals and that it is not in the best interests of shareholders to call a special meeting at this time.

The company pointed out that during a review of business strategy and investments at the end of the fourth quarter in 2010, advisers from J.P. Morgan hired by E-Trade said that a sale was not in the best interest of the company.

The requested change for Board positions was also rejected.

E-Trade called Citadel’s proposal to call a meeting to remove the two independent directors “inappropriate” and “contrary to Delaware law”

The company also pointed out that over the past year and a half, Citadel sold a significant portion of its E-Trade holdings. The hedge fund is still the largest shareholder, owning 9.8 percent of the company’s shares.

The company did not respond to the E-Commerce Times’ request for further comment.

Investors Vying for Change?

Despite E-Trade’s hesitance to discuss a possible sale, Citadel has leverage with the company.

“As the largest shareholder of E-Trade, they’re always going to have an outsized voice at the company, and they’re also kind of remembered as this white knight that saved them from distress,” Jason Ren, senior analyst at Morningstar, told the E-Commerce Times.

Some other investors are eager to see new leadership and solid direction.

“Some of the concerns Citadel brought up were some of our concerns too. If you look at who is in charge, it’s some of the same people from the balance sheet excess days,” said Ren.

A small stock bump after the E-Trade response seemed to indicate that value outlook favored a sale, but the stock is one that is frequently traded throughout the board. More likely is that Citadel, who has always eyed a sale and new direction from the company, is trying to put the pressure on.

“It seems they’re looking for an exit, and this is kind of a way of speeding up the process,” said Ren.

TD Ameritrade Buyer?

Other media outlets reported a potential buyer in online broker service TD Ameritrade.

“They have publicly let it be known they would want to merge and do a consolidation of brokerage. The issue is they have this loan portfolio that’s difficult to value,” Mac Sykes, Analyst at Gabelli & Company told the E-Commerce Times.

Analysts say a deal between E-Trade and TD Ameritrade or another buyer is imminent if the two can figure out a way to co-exist, and if the buyer can feel confident even after an analysis of E-Trade’s balance sheets.

“Needless to say, any institution who might be interested in E-Trade would have to be very comfortable with their loan book — it’s healing but there’s still some question there,” said Ren.

“This is something TD Ameritrade would like to do, and if they can figure out the right price and solution, it makes sense,” said Sykes.