E*Trade Adds Banking for $1.8 Billion

With online trading becoming more commonplace, investment services companies are looking for new ways to distinguish themselves from the trading crowd. E*Trade Group, Inc. (Nasdaq: EGRP) moved a step closer Tuesday with an agreement to buy Telebanc Financial Corp. (Nasdaq: TBFC) for a chunk of stock valued at $1.8 billion (US$).

The Telebank deal is E*Trade’s second major acquisition this year. In April, the company purchased Clearstation, an Internet financial information site with 90,000 regular visitors.

Terms of the Deal

E*Trade is offering Telebanc shareholders 2.1 shares of E*Trade stock for each Telebanc share they hold. Shareholders of Telebanc, arguably the nation’s largest Internet bank, will own 13 percent of E*Trade when the deal is complete. Both companies’ boards of directors have already approved the deal, which now hangs on shareholder and regulatory approvals. The merger is expected to close this fall.

The merger is designed to change E*Trade into a site for more than just stocks. Through Telebanc, E*Trade customers will be able to create an Internet-based, FDIC-insured account to allow cash transfers over the Internet. By delivering its banking and financial services electronically, with no branch buildings to staff, Telebanc says it offers higher interest rates and lower fees than traditional banks.

While E*Trade’s marketing hands can be expected to encourage customers to use those funds to buy stock, mutual funds, and CDs that will become available from Telebanc, the new cash management account can also be used to pay bills online. The account can be accessed offline at automated teller machines through the Cirrus network.

By increasing the services available through E*Trade, the Telebanc deal will help E*Trade’s customer acquisition and retention efforts, the company said, noting it currently has more than one million customers to keep happy.

Last week, Internet tracking company Media Metrix named E*TRADE one of the Web’s two fastest-growing financial sites and the most visited site among those offering online investment services.

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