E*Trade had known that it wanted to be in the banking business as well as the brokerage business. The question was how. Buy an old-line brick-and-mortar bank and take it onto the Web? Acquire a Web bank and mold its culture to that of E*Trade? Bootstrap its own operation from scratch?
Telebanc, based in Arlington, Virginia, had been on E*Trade's radar screen for some time thanks to Bevilacqua and his team, which had been tracking the firm's performance as part of its ongoing market surveillance. "It's one of the things that we do," Bevilacqua explains. "We survey the various industry segments that might be attractive to us -- to see who the players are, who's coming up, and what trends are emerging."
E*Trade had been involved in loose discussions with Telebanc about potential product arrangements, and E*Trade's people had come away from those meetings impressed. Eventually, those talks evolved into more serious discussions about a potential acquisition. In late May, a phone call between E*Trade president and COO Kathy Levinson, 44, and Telebanc cofounder and CEO Mitch Caplan, 42, set the stage for a face-to-face meeting in California.
The meeting was scheduled for 7 PM at Fuki Sushi, but Bevilacqua wanted to get things rolling early. He invited Caplan and the other two members of his team, cofounder David Smilow, 37, and in-house counsel Arlen Gelbard, 42, for a late-afternoon beer at Il Fornaio in Palo Alto. "We got to know one another, and immediately it was clear that these were no-bullshit sort of guys," Bevilacqua recalls. "Within 15 minutes, we were talking about a potential deal."
Bevilacqua liked the directness of the Telebanc executives and returned the favor by putting E*Trade's cards on the table. "I made it clear to them that we were going to be in the banking business one way or another," he says. "But I also said that we would like to cut a deal with them as soon as possible -- potentially that evening."
When it was time to head over to Fuki Sushi, Bevilacqua offered Caplan a lift. Thanks to a major traffic jam, the two had another long chat. "It was clear that he and his team thought much the same way that we think at E*Trade," Bevilacqua says. "They had the same type of aggressiveness -- just getting down to business and doing things as quickly and as practically as possible."
When they arrived at Fuki Sushi, Cotsakos and Levinson were waiting in one of the private tatami rooms at the back of the restaurant. Over the course of an elaborate sushi dinner, the two sides worked out the terms of the deal. Surprisingly, a valuation was never mentioned. What was discussed was how the deal would move forward and how the two companies would be put together. "It wasn't one of these things where we were all marketing to one another," Bevilacqua says. "This was an honest, frank brainstorming session about the areas where the two firms could excel together."
Then the group decided to set a timeline for the deal. Cotsakos said that he thought a reasonable target was one week for completing the acquisition. "Everybody looked at each other and thought, 'Yeah, well, that's awfully aggressive,' " Bevilacqua says with a laugh. The next step was figuring out how to pull it off. "What we said was, 'We're going to pursue it night and day. We're not going to do the transaction in some traditional, prolonged way, letting the investment bankers drive the process. We're going to take control of it, do it together, and set a very aggressive timeline.' "
The only remaining item of business was to come up with a code name for the deal. A few ideas were tossed around, but it was Levinson's that stuck. Given the surroundings, everyone agreed that it was a great name: Project Blowfish was officially underway.
At 8 AM the next day, the team from Telebanc and a larger team from E*Trade (which Bevilacqua had put together over the phone after the Fuki Sushi meeting) met in a conference room at R.R. Donnelly Financial Printing Co. in Palo Alto. Donnelly had done the financial printing for both E*Trade's initial public offering and its secondary public offering. Bevilacqua chose the venue because he knew that it would be both secure and discrete. "We were going to extra lengths to make sure that this transaction was kept confidential," says Bevilacqua, who had been asked by Cotsakos to lead the project for E*Trade.
The first action item was formalizing the roles of the E*Trade team. Bevilacqua had called in a dozen key players, including E*Trade personnel, outside lawyers, and investment bankers. "We laid out who would be responsible for what level of due diligence," he says. "Basically, we were going over the questions that we wanted answered and developing an outline for our investigation of the Telebanc business."
The next step involved logistics. Both the Telebanc members and the E*Trade team had to get to Washington, DC, where the rest of the negotiations would take place. Absolute confidentiality was of the utmost concern. That applied not only to the meeting site (the Washington offices of Brobeck, Phleger & Harrison) but also to the travel arrangements themselves. Team members were told to depart on staggered flights throughout the evening, so that there would be no chance of a large group of E*Traders being seen together.
"I want this operation run with military precision," Cotsakos told the group. "And that," explains Bevilacqua, "is really how we approached the whole thing."
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