TD Ameritrade Holding and its largest stakeholder, Toronto-Dominion Bank, agreed to buy Scottrade Financial Services Inc. for $4 billion, combining two of the largest online brokerages while expanding the U.S. operations of Canada's second-largest lender.
TD Ameritrade will acquire Scottrade's brokerage operations for about $2.7 billion in cash and stock, the firm said Monday in a statement. Toronto-Dominion, which owns about 42 percent of TD Ameritrade, agreed to purchase Scottrade's online bank for $1.3 billion in cash, adding to its U.S. branch network that stretches from Maine to Florida, the Toronto-based lender said in a separate statement.
The deal is expected to be completed by Sept. 30, 2017, with clearing operations moving to TD Ameritrade systems the next year. About 28 million shares in TD Ameritrade will be issued to Scottrade shareholders and Toronto-Dominion will purchase another 11 million shares in the firm, which will help fund the $1.7 billion cash portion of the price. The companies expect $450 million in annual cost savings, with a quarter of that coming in the first year after the close.
"This combination will allow us to leverage our strengths, increase our scale and further accelerate our asset gathering capabilities," TD Ameritrade Chief Executive Officer Tim Hockey said in the statement.
The acquisition of Scottrade adds to a flurry of recent deals in an industry that's facing pressure from lower trading volumes and sluggish revenue growth. E*Trade Financial Corp. bought Aperture New Holdings Inc., parent of the futures and options trading platform OptionsHouse, in a $725 million cash deal in July, and Ally Financial Inc. purchased TradeKing Group Inc. for about $275 million a month earlier.
TD Ameritrade shares rose 42 cents to $37.50 at 7:47 a.m. in early trading in New York. The stock climbed 6.8 percent this year through Oct. 21, while Toronto-Dominion shares increased 11 percent.
Toronto-Dominion gains Scottrade Bank, a business with about $13 billion in cash and securities, $4 billion in loans and leases and $15 billion in sweep deposits as of Sept. 30. Scottrade Bank offers personal banking for Scottrade brokerage customers, business lending, loan servicing and commercial equipment financing. Toronto-Dominion will take $175 million of goodwill tied to the acquisition, and its Common Equity Tier 1 ratio will decrease by about 30 basis points after the deal. The acquisition is expected to add to earnings in the first full year after closing. Its stake in TD Ameritrade will be 41.4 percent after the deal, the lender said.
Toronto-Dominion has spent more than $17 billion building a U.S. branch network since 2005 and has sought to fortify its wealth-management business since buying New York money manager Epoch Investment Partners in 2013 to attract more wealthy American clients. The lender has more recently focused on buying credit-card portfolios, though CEO Bharat Masrani said as recently as September that he's still interested in "tuck-in acquisitions" and other U.S. assets if they make strategic sense.
TD Ameritrade, based in Omaha, Nebraska, has a market value of $19.5 billion. Closely held Scottrade, based in Town & Country, Missouri, had $1.04 billion of revenue in 2015, Wells Fargo & Co. analysts led by Christopher Harris said in a report this month.
Online platforms are used by consumers, wealth advisers and other investors to trade securities outside of traditional brokerages. The brokerages have been squeezed in recent years amid competition from automated investment systems known as robo-advisers and a shift away from stock picking and day-trading toward passive vehicles.
Scottrade CEO Rodger Riney, who co-founded the discount brokerage in 1980, will join the TD Ameritrade board of directors as part of the deal. Riney's 75 percent stake is valued at $2.2 billion, according to the Bloomberg Billionaires Index. The company announced last year that he was undergoing treatment for multiple myeloma, a form of blood cancer.
Scottrade's business is profitable, but less than its peers and the company's revenue hasn't grown since 2014. These challenges, along with Riney's health, could influence the decision to sell, the Wells Fargo analysts said earlier this month.
TD Ameritrade was created in January 2006 when the former Ameritrade Holding Corp. bought Toronto-Dominion's U.S. network of independent advisers, TD Waterhouse. In exchange, the bank received a large stake in the combined firm. The companies have maintained close business ties. Hockey agreed last November to leave Toronto-Dominion, where he ran Canadian banking and wealth management, to become TD Ameritrade's president and successor to then CEO Fred Tomczyk on his September retirement.
"This announcement allows TD and TD Ameritrade to further strengthen our relationship," Masrani said in a separate statement. "We are pleased to see TD Ameritrade expand its business and solidify its leadership position in the market."
Barclays Plc is advising TD Ameritrade, while Goldman Sachs Group Inc. is serving as Scottrade's adviser on the deal. Wachtell, Lipton Rosen & Katz and Sullivan & Cromwell are the respective legal counselors.