Ameritrade’s deal to buy its TD Waterhouse discount brokerage competitor may create more than just scale for the Omaha online broker, according to analysts.
It would also mean adding TD Waterhouse’s long-term investors to the traders Ameritrade has catered to and could mean more wallet share, something the company has said for months it wants to cultivate. CEO Joe Moglia said in a conference call that the deal “enhances our position in the active trader space and immediately puts us into the segment with long-term investors and makes us a player in the adviser market.”
Ameritrade announced Wednesday that it had agreed to buy the U.S. online brokerage unit from Toronto-Dominion Bank. The deal’s price was not disclosed; it is expected to close in six months. Analysts said the price was about $3 billion. Mr. Moglia would be chief executive officer of what is to be named TD Ameritrade.
David Trone, an analyst at Fox-Pitt Kelton who covers Ameritrade, said the deal would give it access to a different type of customer. Ameritrade would be able to develop the long-term investor base that comes with TD Waterhouse.
“This deal allows Ameritrade to diversify its customer base from simply traders to bona fide investors,” he said. “They don’t want just day traders and recreational traders. They want to develop wallet share.”
The deal would create the largest online retail broker, the companies said, as measured by average daily retail equity trades. Pro forma for the 12 months through March 31, combined average daily trades would have been 293,000. Also pro forma, annual revenue would have been $1.8 billion and annual net income, $557 million. TD Ameritrade would have the third-largest account base, about 5.9 million.
Toronto-Dominion is to get 32% of the combined brokerage companies, and Ameritrade stockholders will be paid a $6 per share dividend once the deal closes, to be funded from borrowings, excess cash, and TD Waterhouse’s capital. Ameritrade said it expects the deal to realize $578 million of “gross synergies” within 18 months, including cost savings and fresh revenue opportunities. Toronto-Dominion is to buy Ameritrade’s Canadian brokerage business for $60 million.
Thinking about the deal’s implications, Burton Greenwald, the president of the BJ Greenwald Associates consulting firm in Philadelphia, said gaining access to mid-range investors would let Ameritrade suddenly compete against bank brokerage firms for customers. “This represents a major competitor that the banks will be challenged by and, from a technical point of view, a competitor that has a greater expertise than the banks,” he said.
Online brokerage companies have been trying to develop new asset streams since the tech bubble burst, Mr. Greenwald said, and TD Ameritrade could be a much more aggressive accumulator of assets from long-term investors.
Other analysts said the deal would have little impact on banks.
“The core customer for banks is not an Ameritrade or TD Waterhouse customer,” said Paul Werlin, the president of Human Capital Resources in St. Petersburg, Fla. “Bank customers are savers not investors. This will have a minimal impact on banks. It might impact the banks as you go higher up the food chain and they battle with Ameritrade for wallet share. But as you come down-market, the impact becomes negligible.”
Ameritrade has spent much of the past two years looking for new revenue streams. Mr. Moglia has said that though it applied for a bank charter his company had no plan to offer banking products. But it would offer more long-term investment products in a search for wallet share, he said.
Discount brokers have been expanding their services in recent years. Companies like Charles Schwab Corp. and E-Trade Financial Corp. now offer checking and savings accounts, credit cards, and mortgages. In 2003, Schwab built a bank from scratch to capture a bigger share of its customers’ assets.
E-Trade Complete, which combines trading, investing, cash, and debt accounts, was started in May.
Richard A. Herr, an analyst at Keefe, Bruyette & Woods Inc. who covers Ameritrade, said the deal would give it instant access to a group of long-term investors and more assets.
“By building a presence with long-term investors, Ameritrade will be able to develop more wallet share,” he said. “More wallet share means more consistent earnings and more consistent streams of revenue regardless of the swings in the market.”
Analysts said many efforts to develop new products and platforms have not helped brokerage companies grow. So E-Trade, Ameritrade, and Schwab have been in a pricing war since last year to try to jump-start trading volume, but the fee-cutting has hurt the brokers without stoking trading, and now consolidation looks like the answer.
“Don’t assume that consolidation for the industry is over,” Mr. Moglia said Wednesday. “And don’t assume it is over for Ameritrade.”
“In the discount brokerage community there are too many firms chasing too few customers over the course of the last five years,” said Kenneth Kehrer, the president of Kenneth Kehrer & Associates in Princeton, N.J. “This means we are going to see more consolidation.”
Mr. Herr said he expects consolidation, too. E-Trade made an unsolicited bid for Ameritrade last month, and E-Trade’s final offer, $17.50 a share, came this week.
E-Trade has alternatives to its hostile bid for Ameritrade, he said. A merger into Schwab could make sense, he said, or it could bid for Harrisdirect, the online brokerage arm of Bank of Montreal.
Online brokers like Fidelity and Scottrade will probably choose to sit tight and wait to see how things shake out, Mr. Herr said. Consolidation would not affect banks because few have been effective at grabbing customers from brokerage firms, he said.
“The one-stop-shop financial supermarkets haven’t worked in the United States,” Mr. Herr said. “I still think the U.S. retail investors go to brokerage companies for their brokerage accounts and banks for their bank accounts. [This sort of] cross-selling has not worked for banks in the United States.”
