TD Ameritrade Holding Corp.'s move to buy thinkorswim Group Inc. would give TD Ameritrade scale and dominance in the online options trading business.
In the $606 million stock-and-cash deal, expected to close in the next six months, TD Ameritrade would gain thinkorswim's $3 billion of client assets under management in 87,000 retail brokerage accounts that place an average of 176 options trades a year.
TD Ameritrade is already the industry leader in daily equity trades, and thinkorswim leads in daily retail option trades.
After the purchase, TD Ameritrade would have about $281 billion of client assets, 7.1 million accounts, and 350,000 average daily client trades, including 73,000 option trades, said Bill Gerber, the Omaha company's chief financial officer.
"This deal really underscores our position as an industry consolidator," he said.
Fred Tomczyk, TD Ameritrade's chief executive, said during a conference call Thursday that the acquisition would advance his company's growth strategy "by several years" and would enhance its options trading, futures, foreign exchange, and portfolio margining capabilities.
Analysts said a nonpublic informal Securities and Exchange Commission inquiry of thinkorswim drove down the price. Investools Inc. changed its name to thinkorswim in May, shortly after revealing the SEC was conducting an inquiry of certain presentations made by the company.
Mr. Tomczyk said TD Ameritrade closely examined the investigation.
"We'll deal with the SEC and the regulators with the thinkorswim management team," he said. "For now, they are handling it."
TD Ameritrade's dealmaking might not stop with thinkorswim, Mr. Tomczyk said.
"We have been building capital and building cash. If something else comes along that makes sense, we'll take advantage of it depending on market prices."
Analysts said small brokerage firms like thinkorswim are facing heavy pressure to increase revenue or sell themselves to large firms like TD Ameritrade, E-Trade Financial Corp., Scottrade Inc., Fidelity Investments, and Charles Schwab Corp., which collectively control 96% of the discount brokerage business.
TD Ameritrade has been looking at different deals for the past few years. Last year it was rumored to be interested in buying E-Trade, but Mr. Tomczyk squashed that rumor during his company's earnings conference call in October.
On Thursday he said the change in market conditions made a deal more palatable. "This was an attractive transaction of an attractive asset at an attractive price. We are taking advantage of market conditions with our capital and our strong balance sheet."
Geoffrey Bobroff, an analyst with Bobroff Consulting Inc. in East Greenwich, R.I., anticipates more buying opportunities at a discount for companies like TD Ameritrade as small competitors deal with tough market conditions.
"This is a very difficult market, and with prognosticators predicting an L-shaped recovery, it will be very difficult for small players to recover or large players, like TD Ameritrade, to generate organic growth," he said. "Large players can deal with this by growing their business through acquisition until market conditions enable you to grow organically again, but small players are going to face some critical volume questions."
Donato A. Montanaro Jr., the chairman and chief executive at Kane Reid Securities Group Inc., a Boca Raton, Fla., discount broker that uses the TradeKing brand, said the past few months have been difficult, and he expects more consolidation in the industry, but he thinks small companies can still compete. His firm, which launched in December 2005, has attracted 130,000 customers in just over three years by offering trades for $4.95.
"Think about thinkorswim," he said. "They competed and grew through down and up cycles, and their growth was tremendous over the past 10 years."
Large discount brokerages are realizing that small ones have a lot of capabilities and "a certain nimbleness in terms of innovation," Mr. Montanaro said. "Ameritrade said it would have taken them three years to develop what thinkorswim had. It is amazing for me to think anything could take three years to develop. That is the advantage of being smaller."
Mr. Tomczyk said thinkorswim has increased its options trading 172% over the past two years, while the industry has increased its options trading 44%.
"The reality is we are getting a company that is an options player, and options trading is experiencing growth at a healthy pace," he said. "They have breezed past everyone. They have breezed past us in the past few years. This was clearly the most attractive options player out there."
Mr. Montanaro said that options trading has continued to grow during a tough year for day trading. According to the Options Clearing Corp., despite last month's "light" volume, last year option trading volume increased 25% from a year earlier.
"This deal is an example that retail adoption of options trading is what is fueling the most powerful growth in self-directed online brokerage right now," Mr. Montanaro said. "The fastest growing online brokers are brokers that focus on the needs of options traders. In this environment, it is clear that retail investors need to get their hands and minds around options trading."
Half of TradeKing's daily volume is in options, he said. Options trading is attractive because it allows investors "to make money not just in up markets, but in volatile, choppy markets."
Mr. Bobroff said: "We can be as optimistic as we want, but nothing is growing right now. Options aren't growing, and smaller companies have to consider being acquired, while larger companies, like TD Ameritrade, can buy something that will make them more competitive when the day trading market catches on again."
According to Mr. Tomczyk, after the purchase, thinkorswim would be rebranded as a TD Ameritrade active trading platform. Tom Sosnoff, thinkorswim's founder, would run the platform.
Toronto-Dominion Bank, which owns a minority stake in TD Ameritrade, endorsed the transaction and said it would not materially affect the Canadian company's earnings or capital.