Charles Schwab Holds Talks to Buy TD Ameritrade
22 November 2019 - 11:34AM
Dow Jones News
By Rachel Louise Ensign and Christina Rexrode
Charles Schwab Corp. is in talks to buy TD Ameritrade Holding
Corp. in a deal that would reshape the discount-brokerage market,
where millions of individual investors buy and sell stocks.
The companies have held on-and-off talks for months and were
close to a deal Thursday, though there is still no guarantee they
will reach one, people familiar with the matter said. If they do,
it would likely value TD Ameritrade at around its current market
value of $26 billion.
A merger would cement Schwab's role as the dominant player in
the industry. The San Francisco-based firm is the largest discount
broker, while TD Ameritrade, based in Omaha, Neb., is No. 2. These
firms have traditionally catered to lower-end clients with cheap
online offerings, a business model that big Wall Street brokers
such as Morgan Stanley and Bank of America Corp. are increasingly
emulating.
A deal could fortify TD Ameritrade and Schwab at a time when
they are under pressure from falling trading commissions and a
dwindling pool of fees for managing clients' money. Schwab last
month said it would make online stock trades free, the latest salvo
in a price war that has thinned margins across the industry just as
falling interest rates crimp the income brokers earn on clients'
cash. The announcement knocked $13 billion in combined value off
the stocks of Schwab, TD Ameritrade and E*Trade Financial Corp.,
the smallest of the three main players.
TD Ameritrade quickly followed suit in cutting online trading
commissions to zero, a move the broker acknowledged would lower its
quarterly revenue by about 15%. The moves prompted speculation they
would spark a new wave of consolidation among electronic brokers. A
merger could help fortify the companies against the onslaught,
affording opportunities to cut costs and improve profitability.
But the merger is likely to receive close scrutiny from
regulators, given the firms' dominant positions in the industry and
their direct contact with individual investors. They can point to
new challengers such as Robinhood Markets Inc., a startup that has
amassed about six million users by offering free stock trades, and
an explosion of robo advisers that offer low-cost advice and
exchange-traded funds.
TD Ameritrade and Schwab shares surged Thursday on news of the
potential deal, which was reported earlier by Fox Business Network
and CNBC. TD Ameritrade stock jumped 17% to $48.38 while Schwab
shares rose 7.3% to $48.03.
Once upstarts, the online brokers now command trillions of
dollars in client assets from millions of customers attracted by
lower fees and individual brokers who have defected from big Wall
Street firms along with their clients' money.
The firms have also been helped by the long bull run in stocks
following the financial crisis, which has helped them draw in aging
baby boomers and do-it-yourself investors with swelled account
balances.
Schwab, a pioneer in free online trades, now has some $3.85
trillion in client assets and 12.2 million active brokerage
accounts. That dwarfs the client balances held by its Wall Street
rivals, including the U.S. retail-brokerage units of Bank of
America, Morgan Stanley and UBS Group AG.
Schwab's reach now stretches beyond its brokerage roots,
spanning banking, financial-advisory and custodial services.
Earlier this year, it agreed to buy brokerage and wealth-management
operations from insurer USAA for $1.8 billion, a move that pushes
it further into the coveted business of financial advice. After the
rally in its shares on Thursday, Schwab's market value stands at
about $62 billion.
Schwab got its start in 1963 as an investing newsletter before
moving into the brokerage business and opening branches that
offered client seminars. The discount-brokerage industry grew
rapidly after the Securities and Exchange Commission deregulated
broker commissions in 1975. That paved the way for upstarts like
Schwab, unburdened with heavy overhead, to offer clients services
for less.
The business boomed in the late 1990s as technology stocks
soared and individuals flocked online to buy stocks on their own
for a fraction of what traditional brokers had charged them.
TD Ameritrade was born of a 2005 merger between Ameritrade
Holding Corp. and Toronto-Dominion Bank's TD Waterhouse. The
Canadian bank still owns a roughly 40% stake in TD Ameritrade,
which says it provides investing and trading services for 11
million client accounts with a total of more than $1 trillion in
assets, as well as custodial services for more than 6,000
independent registered investment advisers.
Justin Baer and Liz Hoffman contributed to this article.
(END) Dow Jones Newswires
November 21, 2019 19:19 ET (00:19 GMT)
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