Charles Schwab to buy TD Ameritrade in $26-bn brokerage deal

Under the agreement, TD Ameritrade stockholders will receive 1.0837 Schwab shares for each TD Ameritrade share, which represents a 17 per cent premium over the 30-day volume weighted average price exchange ratio as of 20 November 2019.

The combination of the two leading brokerages creating a company with $5 trillion in assets under management will squeeze the discount-led retail brokerage industry, and put smaller rivals under pressure to combine or quit.

In a market where nimbler startups are gaining market share by eliminating commissions on stock trades, the discount brokerage business is under pressure. 

Last month, Schwab became the first major brokerage to eliminate commissions, a move followed by others including Fidelity Investments, E*Trade Financial Corp (ETFC.O) and TD Ameritrade.

The transaction brings significant strategic benefits for the combined organization and is expected to deliver attractive returns for the owners of both companies, while further improving the investing and trading experience of both Schwab and TD Ameritrade clients. It allows Schwab to continue to add further scale on top of its organic growth, helping to drive sustainable, profitable growth and long-term value creation. 

More specifically, the acquisition will add to Schwab approximately 12 million client accounts, $1.3 trillion in client assets, and approximately $5 billion in annual revenue. This added scale is expected to result in lower operating expenses as a percentage of client assets, help fund enhanced client experience capabilities, improve the company’s competitive position and further its financial success and diversification of revenue. The resulting combined firm is expected to serve 24 million client accounts with more than $5 trillion in client assets; taken together, the two firms recently generated total annualized revenue and pre-tax profits of approximately $17 billion and $8 billion, respectively, says a joint press release.

The transaction has been unanimously approved by the boards of drectors of Schwab and TD Ameritrade, as well as the Strategic Development Committee of TD Ameritrade’s Board—a committee comprised solely of outside, independent directors that was established by the board of directors of TD Ameritrade to oversee and conduct the process and all negotiations concerning the transaction on behalf of the board. 

Post-closing, The Toronto-Dominion Bank, which currently holds approximately 43 per cent of TD Ameritrade’s common stock, will have an estimated aggregate ownership position of approximately 13 per cent in the combined company, with other TD Ameritrade stockholders and existing Schwab stockholders holding approximately 18 per cent and 69 per cent, respectively. TD Bank’s voting stake will be capped at 9.9 per cent, with the balance of its position held in a new, non-voting class of Schwab common stock. Additional details regarding stockholder matters, including upcoming votes, will be provided in the subsequent merger proxy materials.

Schwab President and CEO Walt Bettinger said, “We have long respected TD Ameritrade since our early days pioneering the discount brokerage industry, and as a fellow advocate for investors and independent investment advisors. Together, we share a passion for breaking down barriers for investors and advisors through a combination of low cost, great service and technology. 

“With this transaction, we will capitalise 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 and TD Ameritrade started out as alternatives to traditional Wall Street brokerages. They helped lead a revolution to become the preferred model for full-service investing among tens of millions of direct investors and the go-to providers of custodial and consulting services for thousands of independent investment advisors. 

With the announcement, the TD Ameritrade board of directors has suspended its previously disclosed CEO search, naming Stephen Boyle, TD Ameritrade EVP and CFO, as the company’s interim President and CEO. Boyle will assume leadership of the company immediately, guiding its management team through its fiscal 2020 plan and the proposed integration with Schwab.

“Partnering with Schwab on this transformative opportunity makes the right strategic and financial sense for TD Ameritrade,” Boyle said. 

“Together, we can deliver the ultimate client experience for retail investors and independent registered investment advisors. We can continue to challenge the status quo, pooling our resources and expertise to transform lives—and investing—and deliver sustainable, long-term value to our many stakeholders.”

“One of Chuck Schwab’s ambitions has always been to build a strong and independent Schwab that would be around to serve clients for many years in the future. We believe the combination of our two great companies positions us to be competing and winning in the investment services business for the long run—the very long run,” Bettinger added.

In addition, this transaction included a renegotiation of the Insured Deposit Account (IDA) agreement by Schwab and TD Bank, to be effective at closing. The agreement was extended for a 10-year term beginning in 2021, and the servicing fee paid by Schwab on balances within the IDA was reduced by 10 basis points. Over time, Schwab will have the option to reduce balances routed to the IDA sweep program, subject to certain restrictions. This arrangement provides flexibility to optimize related revenue as those balances are shifted to Schwab.

With anticipated synergies, the deal is expected to be 10-15 per cent accretive to GAAP EPS and 15-20 per cent accretive to Operating Cash EPS in year three, post-close. Focusing on expenses, current estimates are for approximately $1.8 to $2 billion run-rate expense synergies, which represents approximately 18-20 per cent of the combined cost base. 

The transaction is subject to customary closing conditions, including receipt of applicable regulatory approvals and approval by the stockholders of both companies.