Charles Schwab extends reach in industry
Brokerage to buy rival TD Ameritrade for $26 billion in a megadeal that could attract antitrust scrutiny.
Charles Schwab Corp. agreed to buy TD Ameritrade Holding Corp. for about $26 billion in a deal that would reshape the retail brokerage business.
Schwab, America’s original discount broker, would have even more sway over the sector it pioneered nearly a half-century ago.
“Our view is that this is a great deal for the consumer,” Schwab Chief Executive Walt Bettinger said on a conference call Monday with analysts. “We’ve been doing nothing but driving costs down for decades.”
TD Ameritrade stockholders would receive 1.0837 Schwab shares for each TD Ameritrade share, the companies said in a statement Monday. That’s a 17% premium based on the average share price as of the close on Nov. 20.
Announcement of the deal comes after news of an acquisition broke on Thursday, sending up shares of both firms.
The equity value of the deal is $28.3 billion based on Schwab’s closing price of $48.20 on Nov. 22. Schwab shares rose 2.3% on Monday to $49.31. TD Ameritrade, the Omaha-based brokerage that’s partly owned by Toronto-Dominion Bank, rose 7.6% to $51.78.
The tie-up would create a mega-firm with $5 trillion in assets — a Goliath that may attract the attention of antitrust regulators, analysts say. Smaller brokerages such as E-Trade Financial Corp. would have to contend with a much more formidable competitor.
The combined firm would relocate its headquarters to Schwab’s new
campus in Westlake, Texas. Schwab’s San Francisco operations would remain a sizable hub.
TD Bank, which holds 43% of TD Ameritrade, would own roughly 13% of the new business. Its voting stake would be limited to 9.9%, with the rest of its position in a nonvoting class of stock. The Canadian lender would have two new seats on the combined firm’s board, while TD Ameritrade would name a single director.
As a result of the deal, Schwab would see its business add 12 million client accounts, $1.3 trillion in assets, and roughly $5 billion a year in revenue.
If the deal goes through, the combined company will have unparalleled clout as a provider of custody services, safeguarding assets managed by registered investment advisors. That may give authorities pause, Keefe, Bruyette & Woods analyst Kyle Voigt wrote Thursday. He estimates Schwab has about a 50% market share of registered investment advisor custody assets, while TD Ameritrade may have as much as 20%.
The deal also could allow Schwab to boost fees on other services, or reduce interest paid to investors on their accounts. Effectively, the company eliminated commissions for U.S. stocks, exchange-traded funds and options, but that headlinegrabbing move could very well mask hidden charges elsewhere.
One of Schwab’s main competitors, Fidelity Investments, released a statement on Monday that played on some of these concerns.
“Unfortunately for investors, the combination of Charles Schwab and TD Ameritrade means they will likely be doubling down on revenue practices that directly disadvantage investors, including paying extremely low cash sweep rates [what it pays on cash in investment accounts] and taking significant payment for order flow,” said Kathy Murphy, president of Fidelity’s Personal Investing business. “These practices can easily outweigh any benefit of $0 online commissions.”
Bettinger downplayed the potential antitrust risks.
“We have numerous competitors, many of which are far larger than us today and far larger than a combined organization,” he said on the call. “They’re going to continue to come right after us, as they are now in all aspects of the business.”
Schwab said in the statement that the new firm would have “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 last month eliminated commissions for U.S. stock trading, forcing other brokerages to follow suit and sweeping away an important revenue stream. Analysts speculated that online brokerages might have to cut deals to survive the increased industry pressure.
TD Ameritrade has relied more on commissions than some competitors, drawing 36% of its net revenue from commissions in 2018, compared with 7% at Schwab.
Founder Charles Schwab hinted he was open to dealmaking in an interview with Bloomberg Radio in October. “I don’t know whether we’ll be successful in that pursuit, but in the industry you’re going to see more consolidation, more firms getting together,” he said. “You just have to have that scale and volume.”
The acquisition comes after TD Ameritrade announced in July that CEO Tim Hockey would leave early next year. Hockey denied at the time that his departure had anything to do with a potential deal.