Schwab buys TD Ameritrade in brokerage blockbuster

CHARLES SCHWAB is buying rival TD Ameritrade in a US$26 -billion stock swap, a blockbuster agreement accelerated by massive disruption in the online brokerage industry. Competitive pressure has already forced brokerages to make it free for customers to trade US stocks online, and Schwab’s buyout combines two of the biggest players in the industry.

The tie-up creates a company so big, however, that it may draw sharp scrutiny from antitrust regulators. The combined company would have more than US$5 trillion in client assets under management.

“With this transaction, we will capitalise on the unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution that will be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys,” Schwab CEO Walt Bettinger said in a prepared statement.

TD Ameritrade stockholders would receive 1.0837 Schwab shares for each TD Ameritrade share they own.

The transaction gives Schwab about 12 million client accounts, US$1.3 trillion in client assets and approximately US$5 billion in annual revenue. The combined company is expected to control 24 million client accounts.

By itself, Schwab may control close to half the market for acting as a custodian for money managed by registered investment advisers, for example, while TD Ameritrade may control about 15 per cent to 20 per cent, according to Kyle Voigt, an analyst with Keefe, Bruyette & Woods.

LUCRATIVE REWARD

The rewards for passing regulatory muster would be lucrative: A combined company “makes strong strategic sense,” would be able to cut costs, and could bump up Schwab’s earnings per share by more than 25 per cent over the long term, Voigt said.

The deal could also herald more mergers across the industry. Schwab sent shock waves through the industry less than two months ago when it said it would do away with commissions for online trading of US stocks and exchange-traded funds, fees that have long fuelled the industry.

All major brokerages have followed suit, but fees had been falling for years.

Beyond players like Schwab, TD Ameritrade, Fidelity and E-Trade Financial, apps like robinhood.com out of Palo Alto, California, have also entered the fray to help customers get invested in the market.

That has increased the pressure on San Francisco’s Schwab Corp and TD Ameritrade Holding Corp of Omaha, Nebraska, the biggest publicly traded brokerages. Schwab had US$3.85 trillion in total client assets at the start of the month, while TD Ameritrade had US$1.3 trillion at the end of September.

The deal is expected to close in the second half of next year. It’s anticipated to take 18 to 36 months to integrate the two businesses once the transaction is complete. The corporate headquarters of the combined company will eventually relocate to Schwab’s new campus in Westlake, Texas.

The Toronto-Dominion Bank, which currently holds approximately 43 per cent of TD Ameritrade’s stock, will have an ownership position of approximately 13 per cent in the combined company, with other TD Ameritrade stockholders and existing Schwab stockholders holding approximately 18 per cent and 69 per cent, respectively.

TD Ameritrade suspended its search for a CEO, naming Chief Financial Officer Stephen Boyle as interim CEO. The current CEO, Tim Hockey, announced in July that he would be stepping down early next year.