Financial Firms Weigh Expansion Closer to Home or Farther Afield

By Jerry Knight
Monday, June 13, 2005

The future of three of the Washington area's biggest financial services companies depends on a question nobody can answer with confidence.

Investors in Capital One Financial Corp., Legg Mason Inc. and E-Trade Financial Corp. all need to know how Americans are going to manage their money in the 21st century.

Will we still do business with the bank on the corner and the stockbroker down the street? Or are nationwide brands and online access the only ways to go?

Will we be customers of a "financial supermarket" or a group of "boutiques" that cater to our specialized needs?

Will a credit card just be a credit card, or will it be the electronic key to the financial services provider of our choice?

Capital One, Legg Mason and E-Trade each have their own answers and are adopting new business strategies to prepare for the future as they see it.

E-Trade still would like to grow by acquiring one of its rivals in online financial services, although the rivals seem more inclined right now to do a deal with each other. Capitol One is moving into traditional banking and other services beyond filling your mailbox with credit card pitches. And Legg Mason seems to have decided that the local brokerage offices upon which the company was built are not in its future.

How right they are about picking their targets and how close they come to hitting them will determine how well their stocks perform in the future.

When we last looked in on E-Trade in May, the company, whose top executives are based in Arlington, had made an offer to buy Ameritrade Holding Corp., one of its top rivals in online financial services. Now, E-Trade has bettered its bid, but Ameritrade is still saying "no thanks." Instead, Ameritrade is talking now to TD Waterhouse USA, the third big player in their niche. Last year, E-Trade made a run at Waterhouse, which is owned by Canada's Toronto-Dominion Bank, but the two companies called off the deal on Jan. 19.

E-Trade's advantage is that it has both an online stock trading business and the nation's biggest online bank. Ameritrade is solely a broker, while Waterhouse is a hybrid, with online and branch-based operations.

The ideal merger would be to meld all three firms into an industry powerhouse, but egos, money and the tricky job of driving a troika stand in the way.

After building itself into the nation's fifth largest credit care issuer, McLean's Capital One is buying a bank and building up its car loan, home-equity loan and overseas lending operations in an effort to avoid being labeled what industry experts call a "mono-line credit card" operation.

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