The tie-up creates a company so big, however, that it may draw scrutiny from antitrust regulators. The combined company would have more than $5 trillion in client assets under management. “With this transaction, we will capitalize on the unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution that will be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys,” Schwab CEO Walt Bettinger said Monday in a prepared statement.
The transaction would give Schwab an additional 12 million client accounts, $1.3 trillion in client assets and approximately $5 billion in annual revenue. The combined company is expected to control 24 million client accounts.
By itself, Schwab controls roughly half the market for holding money managed by and providing other services to registered investment advisers, according to estimates by Kyle Voigt, an analyst with Keefe, Bruyette & Woods. TD Ameritrade may control about 15% to 20%,
The rewards for passing regulatory muster would be lucrative: A combined company “makes strong strategic sense,” Voigt said. It could also save up to $2 billion in annual costs. The deal could also herald more mergers across the industry.
The full impact of the merger on consumers is still to be determined. But it’s the result of several industry-shaking moves that have drastically lowered costs and made trading easier for customers. And a larger Schwab wringing out costs cuts for itself would likely have more wherewithal to keep expenses low for its customers, analysts said.
Schwab sent shockwaves through the industry less than two months ago when it said it would do away with commissions for online trading of U.S. stocks and exchange-traded funds, fees that have long fueled the industry. All major brokerages have followed suit.
Beyond players like Schwab, TD Ameritrade, Fidelity and E-Trade Financial, apps like robinhood.com out of Palo Alto, California, have entered the fray in recent years to help customers get invested in the market.
All the increased competition and lower fees mean investors can now whip out their phone and buy a low-cost ETF in an instant, all while paying zero commissions. It marks a golden age for investors because minimizing costs is one of the easiest ways they can maximize returns as they save for retirement, college tuitions and other goals.
But the fee war has sapped brokerages’ revenue. TD Ameritrade, for example, said last month that it expected its earnings to fall in the current quarter because it dropped commissions. It estimated the revenue hit to be up to $240 million per quarter.
Merging with another company helps to lower costs. Such combinations in the industry typically see the acquirer shaving off 50% to 70% of the costs of its buyout target, while holding onto about 90% to 95% of its revenue, according to analysts at Barclays.
Beyond commissions, brokerages make money from account fees and from interest earned on customers’ cash, among other things. Schwab and TD Ameritrade made a combined $2 billion in net interest revenue in their latest quarters, for example.
Rival Fidelity pointed out how Schwab and TD Ameritrade make some of that money by paying customers lower rates for cash in their trading accounts, known as “sweep accounts.” Fidelity, which is privately held, would still have more in total customer assets than a combined Schwab.
The deal between San Francisco’s Schwab Corp. and TD Ameritrade Holding Corp., of Omaha, Nebraska, would marry the biggest publicly traded brokerages. Schwab had $3.85 trillion in total client assets at the start of the month, while TD Ameritrade had $1.3 trillion at the end of September.
TD Ameritrade stockholders would receive 1.0837 Schwab shares for each TD Ameritrade share they own. The deal is expected to close in the second half of next year. It’s anticipated to take 18 to 36 months to integrate the two businesses once the transaction is complete. The corporate headquarters of the combined company will eventually relocate to Schwab’s new campus in Westlake, Texas.
Nebraska Gov. Pete Ricketts, the son of TD Ameritrade founder Joe Ricketts and a former chief operating officer at the company, said he’ll try to persuade Schwab to keep a presence in Omaha. The Toronto-Dominion Bank, which currently holds approximately 43% of TD Ameritrade’s stock, will have an ownership position of approximately 13% in the combined company, with other TD Ameritrade stockholders and existing Schwab stockholders holding approximately 18% and 69%, respectively.
TD Ameritrade suspended its search for a CEO, naming Chief Financial Officer Stephen Boyle as interim CEO. The current CEO, Tim Hockey, announced in July that he would be stepping down early next year.
Shares of both Schwab and TD Ameritrade rose Monday, on top of the sizeable gains seen Friday when CNBC first reported that the companies were pursuing a deal.
AP Business Writer Michelle Chapman contributed to this story.