Confirming reports from last week, Charles Schwab Corp. (NYSE: SCHW) and TD Ameritrade Holding Corp. (NASDAQ: AMTD) announced Monday morning that the two firms will merge in an all-stock deal valued at $26 billion. Shareholders of TD Ameritrade will receive 1.0837 shares of Schwab stock for each TD share they own.
The exchange represents a 17% premium to TD's 30-day average share price before news of the deal became public on November 20.
Canada's Toronto-Dominion Bank owns 43% of TD Ameritrade and will retain an ownership stake in the combined company of around 13% once the merger is complete, expected in the second half of 2020. Toronto-Dominion voting stake in the combined company will be capped at 9.9% and the remaining ownership stake will be held in a new, non-voting class of Schwab stock.
Schwab CEO Walt Bettinger said:
Schwab said the acquisition will add about 12 million client accounts, $1.3 million in client assets, and approximately $5 billion in annual revenue. The combined firm is expected to serve 24 million client accounts with more than $5 trillion in client assets, and taken together, the two firms recently generated total annualized revenue and pre-tax profits of approximately $17 billion and $8 billion, respectively.
The deal is expected to boost GAAP earnings per share by 10% to 15% and operating cash earnings per share by 15% to 20% in the third year after the transaction closes. The two companies forecast run-rate expense synergies of $1.8 to $2 billion, approximately 18% to 20% of the combined cost base.
As we noted in our coverage last week, the acquisition is big for custodial assets and online brokerage services and will also create a larger custodial company for registered investment advisors (RIAs). Schwab is first among the independent RIA custodian and execution platform, with Fidelity ranking second and TD Ameritrade coming in third place.
Whether the loss of commissions on trades will be replaced remains an open question. Two weeks ago, Schwab reported that it had added 142,000 new brokerage accounts bringing its client assets to a record total of $3.85 trillion. Free trading means more aggressive marketing of other services along with more client deposits to invest. Plus cutting costs, of course.
Now, the big question remaining is, "What about E*Trade Financial Corp. (NASDAQ: ETFC)?" E*Trade has been left standing even though it was most often predicted to be the first in line to be acquired as stock-trading volumes slip, interest rates slide, and most recently, trading commissions evaporate. Schwab eliminated commissions as did TD, E*Trade, and Interactive Brokers Group Inc. (NASDAQ: IBKR). Closely watched startup Robinhood, which kicked off the first online no-commission trading platform in 2013, is another potential acquisition target.
The most-often mentioned acquirer of E*Trade is Goldman Sachs Group Inc. (NYSE: GS) which currently does not have on online brokerage service but is trying to break into the retail banking business with its Marcus initiative. Adding a brokerage service may be a sound option.
Morgan Stanley (NYSE: MS), like Goldman Sachs, could probably use a brokerage service if for no other reason than to gather some client assets to invest as the investment banking business slows.
Of America's other giant banks, Bank of American Corp. (NYSE: BAC) already owns Merrill Lynch, and, JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) also already own brokerage services and have been investing in online technology. already owns Merrill Lynch.
Schwab's shares traded up about 2% Monday morning at $49.13 in a 52-week range of $34.58 to $50.97 and a 12-month consensus price target of $43.20.
TD stock traded up about 7.4% at $51.66 in a 52-week range of $32.69 to $57.88 with a price target of $39.43.