Schwab-TD Ameritrade thunder rolls across sector

Charles Schwab is buying rival TD Ameritrade in a $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 U.S. stocks online, and Schwab’s buyout combines two of the biggest players in the industry. What it means

“With this transaction, we will capitalize 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.

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% to 20%, according to Kyle Voigt, an analyst with Keefe, Bruyette & Woods.

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% over the long term, Voigt said.

TD Ameritrade stockholders would receive 1.0837 Schwab shares for each TD Ameritrade share they own. TD Ameritrade stock jumped nearly 7.6% Monday, at $51.78 a share. Schwab was up 2.3% at $49.31.

The deal could herald more financial sector mergers.

Schwab sent shockwaves through the industry less than two months ago when it said it would do away with commissions for online trading of U.S. stocks and exchange-traded funds, fees that have long fueled the industry. All major brokerages have followed suit, but fees had been falling for years.

That has increased the pressure on San Francisco’s Schwab Corp. and TD Ameritrade Holding Corp., of Omaha, Neb., the biggest publicly traded brokerages.

What’s ahead

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

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.