E*Trade Financial Corporation | Riding the Dot-Com Wave in the Late 1990s
Riding the Dot-Com Wave in the Late 1990s
In early 1996, E*Trade began preparing its own initial public offering (IPO). Porter stepped aside, bringing in Christos Cotsakos to lead the company. Cotsakos, a son of Greek immigrants from Paterson, New Jersey, had been a decorated Vietnam veteran—a volunteer awarded the Congressional Medal of Honor for his actions during the Tet Offensive—before joining the early 1970s startup Federal Express. Beginning at an hourly wage of $3.50, Cotsakos worked his way up the Federal Express ranks over nearly 19 years before becoming president and CEO of Nielsen. With Porter as chairman, Cotsakos was named president and CEO in April 1996 and led E*Trade into its IPO that summer.
E*Trade was adding some 500 customers and as much as $10 million in assets per day; by May 1996, the huge increase in trading volume—in the first half of that year alone volume had tripled, from 50 million shares traded to more than 170 million—proved too much for the company's system, crashing the company's computers and leaving its customers stranded for some two hours. For that two-hour period, the company paid out $1.7 million to cover its customers' losses. A second, more limited glitch occurred in July. By then, however, the company had already begun to prepare for such an event, having leased a 53,000-square-foot space in Sacramento, California, to install a redundant hardware and customer service facility. The growth of its competitors, including the arrival of Schwabs' e.schwab service, forced E*Trade to cut its transaction rate again, to as low as $14.95.
E*Trade's growth pace continued, seeing revenues more than doubling again to near $52 million for 1996. The company also began expanding its services, offering investors the opportunity to buy shares in IPOs and purchase equity in private offerings. Trade volume continued to grow, reaching 8,000 transactions per day, with the Internet accounting for more than a quarter of all transactions. The company also formed a subsidiary, E*Trade Online Ventures, to search for other directions in which the company could expand. One such expansion was the company's agreement with Versus Brokerage to extend the E*Trade brand name to Canada's financial market. A similar agreement would bring the company to Australia in May 1997. In June 1997, E*Trade and leading World Wide Web search engine Yahoo!, which recorded some ten million "hits" per day, announced an agreement which added a direct link to E*Trade's Web site from the Yahoo! site.
With an estimated 40 million Americans online by mid-1997, and a total online community of some 60 million worldwide, E*Trade's future appeared electric. Analysts expected the online investment market to grow from 1.5 million in 1997 to ten million or more by 2000. E*Trade looked forward to becoming the top brand name of this new investment era.
Indeed, during the latter half of the 1990s E*Trade continued its upward climb. The company expanded its services to customers in Australia, Germany, Israel, and Japan. In 1999, revenues increased by 132.4 percent over the previous year to $662.3 million. Despite E*Trade's success, Cotsakos was not satisfied and continued to pursue growth options. Adding to its strong presence in online trading, E*Trade began setting its sights on becoming the world's first digital financial media company. An August 1999 Fortune article reported that "Cotsakos wants every piece of every financial transaction, and he wants it done without any human interaction. He wants E*Trade to tell you how to invest, what it means to invest, and where to invest, and then take a cut from both you and the market maker. He wants to take your company public, insure your car, manage your employees' options, and sell you books about golfing."
True to form, Cotsakos set his sights on acquiring Telebanc Financial Corporation, the largest online bank. Cotsakos met with Telebanc CEO Mitchell Caplan in 1999 and shortly thereafter announced that E*Trade would acquire the bank in a $1.8 billion deal. The transaction was completed in January 2000. That same year, the firm added Electronic Investing Corporation to its arsenal. Cotsakos' strategy appeared to pay off as revenues surpassed $1.36 billion.