Blue Horseshoe Loves E-Trade

Shares of E*Trade Financial Corp. ETFC are soaring this morning, after the company received a letter from its largest shareholder, Chicago-based Citadel LLC telling the company to call a shareholder meeting to maximize value. The hedge fund is the largest shareholder of E*Trade, owning 27.4 million shares. In addition to a possible sale, Citadel wants the removal of Michael Parks and Donna Weaver as directors of the company and the election of independent replacements. In other words, Ken Griffin and his hedge fund are telling the company to sell itself. Here is the filing with the SEC. As of the time of this writing, the stock is up ~15%, but is still down around 6% for the year. Over the past 52 weeks, shares of E*Trade have returned 15%, lower than the S&P 500's return of 22%. Activist investors are around for a reason, and while Citadel is not a traditional activist investor in the mold of Bill Ackman or Carl Icahn, Griffin's team at Citadeal is large enough to ruffle some feathers. A few years ago, Citadel had enough prestige that some were calling it the "Goldman Sachs of hedge funds," and had even discussed floating bonds to the public on a potential entry to the public markets. In the letter, Citadel wrote, "E*TRADE's Board must take immediate action to consider how best to maximize shareholder value. We urge the Board to retain qualified, independent and unconflicted financial advisors to explore strategic opportunities in the interest of increasing shareholder value. We believe a sale of the Company could be achieved promptly and generate significantly higher shareholder value, avoiding the risks of operating as an independent company lacking leadership and financial capabilities. It is also time to move toward a Board that is accountable and responsible. With the departure of Robert Druskin as Chairman of the Board and one other Board member, the Board has the opportunity to fill vacated seats with qualified, independent, objective candidates who are not tainted by the Company's past and ongoing management failures. The Board should seek nominations from its largest shareholders in an effort to secure talented leadership that is committed to the best interests of all shareholders. Furthermore, E*TRADE should eliminate its staggered board structure which encourages entrenchment and shields poorly performing directors from accountability. Staggered boards have for good reason fallen into disfavor in corporate board rooms across the country and it is inexcusable that E*TRADE shareholders are not permitted to elect the entire Board annually in order to align the interests of management and the Board with those of shareholders. E*TRADE has reached a pivotal moment where decisive action can be taken to generate value for all shareholders." Citadel and E*Trade have a strong working relationship, having already infused $2.5 billion into the company during the financial crisis to help stave off mortgage losses, and was responsible for the majority of a $1.7 billion debt exchange in late 2009. Griffin is on the company's board. Citadel obviously sees tremendous value in E*Trade, which is trading at just under 15 times forward earnings. The company has been slowly but surely working off its mortgage portfolio, and Citadel believes that in the hands of a strategic buyer, the company could be worth a lot more. The company is set to report earnings today after the bell, and all eyes and ears will be on the earnings report, as well as what the company has to say about the letter it received from Citadel. Perhaps investors will even get a whiff of who could potentially buyout E*Trade. Maybe it's Blue Horseshoe. ACTION ITEMS:

Bullish:
Traders who believe that E*Trade will ultimately get sold might want to consider the following trades:

• Go long E*Trade common stock or calls, as the purchase price would likely come at a higher level than today's current share price.

Bearish:
Traders who believe that E*Trade will not get sold may consider alternate positions:

• Shorting E*Trade here could be profitable if a sale does not go through. The stock is likely to correct from these levels if a buyer does not emerge.

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