Charles Schwab Corp. is in talks to acquire rival TD Ameritrade Holding Corp., a deal that would create a financial services behemoth with US$5-trillion in assets and set up Toronto-Dominion Bank for a possible exit from the U.S. discount-brokerage business.
The deal talks, reported first by CNBC, come in the midst of upheaval in the sector. Schwab slashed its fees for online trading of U.S. stocks, exchange-traded funds and options at the start of October to stay competitive with nimble startups.
Ameritrade quickly matched the offer with zero commissions, escalating a price war that upended the business model for online trading and sent U.S. brokerage stocks tumbling.
“We think that moving to zero on commission pricing removed a big barrier to consolidation," Devin Ryan, an analyst at JMP Securities, said in a note. Schwab, the largest online broker in the United States, would previously not have wanted to pay up in an acquisition for commission revenue "when it knew it would be pushing those revenues in the industry lower,” he said.
TD, which owns a 43.2-per-cent stake in Ameritrade in addition to the bank’s extensive footprint in U.S. retail banking, was caught in the uncertainty amid investor concerns that Ameritrade’s lower profitability would hit TD’s bottom line.
TD shares have underperformed Canadian peers in the banking sector since the start of October, reflecting some concerns over its stake in Ameritrade. TD’s share price has increased just 1.8 per cent (to Wednesday’s close, before speculation of a deal began to circulate), compared with average gains of 4.3 per cent for the other Big Six banks.
Rumours of a deal sent Schwab shares up 7.3 per cent on Thursday while Ameritrade shares surged 16.8 per cent, reflecting optimism that the merger will generate substantial cost savings from consolidated branches and marketing expenses.
A merger between the two would allow the companies to cut costs and the merged entity would be in a position to try to sell customers more wealth-management services, said Josh Book, founder and chief executive at Toronto-based Parameter Insights, a market research and financial services consultancy. "I suspect we will see a wave of consolidation for these properties,” he said.
The news had little impact on TD’s shares, though. The shares rose just 0.9 per cent, even though its stake in Ameritrade increased to US$11.3-billion, up US$1.6-billion. Ameritrade is now valued at more than US$26-billion, based on its outstanding shares.
As well, some observers argued that the takeover deal could be a good development for the Canadian bank’s U.S. expansion strategy, even if its stake in the combined entity falls to an estimated 10 per cent to 15 per cent, in the case of an all-stock transaction.
“Assuming a smaller stake in a bigger player situation, TD could have a more liquid asset that it could potentially sell to finance a future U.S. regional bank acquisition,” Gabriel Dechaine, an analyst at National Bank Financial, said in a note.
“In our view, this scenario would be positive for TD’s long-term U.S. strategy,” Mr. Dechaine said.
TD did not respond to a request for comment. TD Ameritrade and Schwab also did not respond.
Schwab is a full-service financial firm where fees from online trading drove just 7 per cent of its annual revenue in the 12 months before the fee cut, with banking and wealth-management activities providing tremendous diversification. Ameritrade has been far more dependent on online trading, where fees drove 23 per cent of its revenue.
Besides its ownership stake in Ameritrade, TD also benefits from fees it gets when Ameritrade shifts assets to TD’s balance sheet. According to Mr. Dechaine, this sweep deposit agreement generates about $275-million in revenue for TD.
However, a takeover of Ameritrade could eventually end this agreement if Schwab wanted to keep these fees for itself. Mr. Dechaine noted that TD’s current agreement with Ameritrade is in effect until 2023.
David Berman
Clare O’Hara