Having completed its purchase of TD Waterhouse, Ameritrade Holding Corp. says it will develop a more sales-oriented culture to generate long-term assets from mass-affluent investors.
As TD Ameritrade Holding Corp. - its new brand identity - the Omaha online brokerage company will focus on TD Waterhouse's type of long-term investor in addition to the day traders on whom it built its business as an online discount broker, said Randy MacDonald, the chief financial officer.
The company has begun a product review, he said, and will decide by spring what it will offer - which may include banking products through its link with Toronto-Dominion Bank - to best appeal to long-term investors. It will then launch the new brand "and a new value proposition." The TD Waterhouse purchase makes its Utah bank charter application unnecessary, he said.
Mr. MacDonald said the company would grow organically by targeting mass-affluent, long-term investors - the bread and butter of TD Waterhouse's business. He expects to add investment customers, he said, but will also cross-sell to current Ameritrade customers looking for long-term services.
"In the past, we provided tools for active traders. Now we are working to understand and deliver for more long-term investment needs," Mr. MacDonald said. "In some cases, these are the same people and the same target audience," he said, however.
"Legacy Ameritrade did twice as many trades as legacy TD Waterhouse did," he added. "However, TD Waterhouse had twice as many assets. TD Waterhouse has done a great job at producing a brand that has clear appeal to long-term investors. We want to use that model to grow our business organically."
Mr. MacDonald said this means changing from a marketing culture to a sales culture.
"We were a marketing machine, and now we have a national branch network," he said. "We are shifting from a marketing to a sales culture. Our branches will be paid to bring in new assets and new accounts."
TD Ameritrade will shutter 40 of the 140 branch offices it bought with TD Waterhouse, however, according to Joe Moglia, the Nebraska company's chief executive officer. During a conference call Wednesday he said the remaining 100 branch offices would have about 530 employees. The 140 branches have 600 employees, Mr. MacDonald said.
Katrina Becker, a spokeswoman for TD Ameritrade, said some former TD Waterhouse executives will join the new company. Chris Armstrong, who was the president and chief executive officer of TD Waterhouse, will be the highest-ranking TD Waterhouse alumnus at TD Ameritrade when he assumes his new post as executive vice president of sales and marketing, she said.
TD Ameritrade is retaining the branches in the most profitable sites for its mass-affluent strategy, Mr. MacDonald said. These will be added to the half-dozen Ameritrade branches.
"We are taking people and moving them into 100 branches and paying them based on their success," he said. "If they are successful at bringing in new assets and new accounts, they will be paid for that performance. We want to turn all of our guns on branches that are effective and profitable."
Asiff Hirji, the chief operating officer of TD Ameritrade, said TD Waterhouse's staff previously was compensated for assets generated and for selling specific products. Under the new compensation structure, he said, each branch and staff member will be compensated "for their ability to garner new accounts and new assets."
"We believe that we have a compelling proposition for mass-affluent individuals," Mr. Hirji said. "It is better than what customers can get elsewhere, and it is up to the branch staff to get that message across."
An analyst said TD Ameritrade's expansion strategy can succeed. Richard Herr of Keefe, Bruyette & Woods Inc., who covers the online discount brokerage company, said success could come because the deal brings together cultures that do not overlap too much.
"Previously, Ameritrade didn't have much of a physical presence, so I don't think you are going to see a culture clash," Mr. Herr said. "People in the investment centers will work there. They aren't combining Ameritrade people with TD people. There will be very little overlap in terms of the legacy companies."
"What made this deal so attractive for Ameritrade is that they really did get a ready-made franchise to go after long-term investors," he added.
But Matt Snowling, an analyst at Friedman, Billings, Ramsey Group Inc. who covers TD Ameritrade, downgraded the company on Thursday to "market perform" and cut his 12-month price target by $1, to $21. He said the integration of TD Waterhouse would be a challenge, and he foresaw possible commission pricing pressure and fewer benefits from interest rates in the next few quarters.
"While the company increased their revenue expectations, the high end of guidance came in below our expectations," Mr. Snowling wrote.
Mr. MacDonald said Ameritrade plans to use the platform it got with TD Waterhouse to offer a wider array of products and services to current mass-affluent customers and to brand-new ones. In coming months, he said, Ameritrade would look at its product array, and the banking products it can offer through its relationship with Toronto-Dominion Bank, to devise a fresh menu.
Discount brokers have expanded 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, deposit, and debt accounts, was started in May.
Ameritrade applied for a bank charter in Utah before buying TD Waterhouse, but Mr. Moglia said last year that he was just interested in offering more long-term investment products, such as money market funds insured by the Federal Deposit Insurance Corp., in a quest for wallet share.
Mr. MacDonald said the TD Waterhouse purchase makes starting a bank unnecessary.
"We have the huge benefit of having a 150-year-old bank without the costs and risks associated with starting a bank," he said. "We are going to look at a variety of products - including credit cards, checking accounts, and debit cards - and figure out what our customers need between now and the spring. In the spring, we will launch a new brand and a new value proposition."
Toronto-Dominion has built a foothold in the United States with its purchases of BankNorth and Hudson United, Mr. MacDonald said, and TD Ameritrade is "exploring what opportunities we have to leverage these relationships."
He said the company wants to find ways to compete with Schwab and Fidelity Investments.
"The Waterhouse deal accelerates our growth plan considerably, as did some of the other deals we have made in the past few years," Mr. MacDonald said. "M&A has been core to our growth and continues to be essential for TD Ameritrade, but so is organic growth. We have to be focused on both of these."
Keefe Bruyette's Mr. Herr said TD Ameritrade must focus on organic growth because it will be difficult to do any more substantial deals to gain scale.
"Clearly between Ameritrade and E-Trade, they acquired a lot of the independent property that was remaining in the discount brokerage space," he said. "There is just not a lot left except for Scottrade. That could be the logical next step. But unfortunately, after that, your targets become very small. There is really no one with enough size to transform the TD Ameritrade business model again."
Ameritrade and E-Trade were active buyers last year. E-Trade bought the online brokerage BrownCo from JPMorgan Chase & Co. for $1.6 billion and Bank of Montreal's Harrisdirect LLC unit for $700 million. E-Trade also made an unsuccessful hostile bid for Ameritrade.
Mr. Herr said flat organic growth and retail investing volume prompted the deals.
"Most retail investors really looked to the real estate market to make their investments in 2005," he said. "I believe so many deals happened because of a lack of organic growth. In 2006 and 2007, we expect retail investors to become more engaged with equity investing, and that will lead to growth for firms like TD Ameritrade."
