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Schwab Closes TD Ameritrade Buyout, Creates a Broker Behemoth

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Charles Schwab SCHW has concluded the acquisition of TD Ameritrade Holding for roughly $22 billion. This led to creation of a behemoth in online brokerage space with combined client assets of more than $6 trillion and serving nearly 28 million brokerage accounts.

The all-stock deal, announced in November 2019, will deliver substantial scale to Schwab, helping it to drive long-term growth and serve a wide spectrum of customers at lower costs. Further, the company anticipates the buyout to reduce operating expenses as a percentage of client assets.

Schwab President and CEO Walt Bettinger said, “As we begin this next chapter, we remain focused on continuing to be the industry’s most trusted leader in investment services. Looking forward, we intend to quickly and efficiently harness our complementary strengths in order to break down even more barriers for investors. In doing so, we intend to deliver a winning combination of low costs, great service and industry-leading technology to support our clients, and the advisors who serve them, across every phase of their financial journey.”

Deal Terms & Other Details

As agreed previously, shareholders of TD Ameritrade received 1.0837 shares of Schwab for each share of TD Ameritrade, except The Toronto-Dominion Bank TD (which had nearly 43% stake in TD Ameritrade). TD Bank got nearly 13.5% stake in Schwab, comprising 9.9% voting shares, and rest being non-voting common shares. These non-voting shares are convertible into voting shares upon transfer to a third party.

So, in aggregate, Schwab issued approximately 509 million voting shares and 77 million non-voting shares as part of merger consideration.

Effective the completion of merger, Todd M. Ricketts, Brian M. Levitt and Bharat B. Masrani were elected to Schwab’s board of directors.  

Additionally, Schwab announced that the change in location of its corporate headquarter to Westlake, TX from San Francisco is likely to be completed on Jan 1, 2021. While the company doesn’t expect any major impact on San Francisco-based positions and is likely to continue hiring in the city, any real estate related decisions will be made as part of integration process.

Integration Timeline

The integration process is likely to take 18 to 36 months, despite the planning for the same being underway since the deal was announced last year. Until then, Schwab and TD Ameritrade will keep serving clients as separate broker-dealers.

Bettinger said, “We are committed to maintaining our sharp focus on seeing ‘Through Clients’ Eyes’ as we begin to integrate our companies carefully and thoughtfully and prepare our plans to transition brokerage accounts at TD Ameritrade’s broker-dealers to Schwab’s broker-dealer in the future.”

Following the integration, the combined company will be well poised to offer “a broader and more extensive range of services and solutions to Schwab and TD Ameritrade clients, including individual investors as well as the Registered Investment Advisors (RIAs) who custody their clients’ assets with the companies.”

As a part of this, in August, Schwab had announced plans to integrate TD Ameritrade’s thinkorswim and thinkpipes trading platforms, and educational resources into its offerings for retail clients and independent advisors.

Moreover, Schwab intends to continue offering TD Ameritrade Institutional’s customizable portfolio rebalancing solution iRebal to independent advisor clients. Also, several other products like wealth management platforms, RIA custody platforms and tools, investor education, retirement services, and banking and asset management will be part of the combined company.

Our Take

Of late, the online brokerage industry is undergoing massive operational upheavals. Last year, several leading players including Schwab and Interactive Brokers IBKR introduced commission-free trading with the aim to gain further market share. These firms, in fact, have witnessed a significant rise in new accounts so far this year, as stock markets witnessed heightened volatility amid the coronavirus mayhem.

Following such disruptions, consolidation was expected in the industry. In sync with that, last week, major investment bank Morgan Stanley MS acquired E*Trade Financial in an all-stock deal worth $13 billion.

Notably, the completion of Schwab’s buyout of TD Ameritrade ends the acquisition spree that the former began in July 2019, when it inked a deal to acquire the assets of USAA’s Investment Management Company. The buyout was closed in May 2020.

Since then, other than TD Ameritrade (one of the most lucrative one), Schwab had announced and closed opportunistic acquisitions of Motif’s technology and intellectual property assets and Naples, FL-based Wasmer, Schroeder & Company, LLC. All these are expected to continue supporting the company’s financials amid low interest rate environment.

Shares of Schwab have gained 4.3% over the past year, underperforming industry’s 11.3% rally.

Currently, Schwab carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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