Charles Schwab to buy rival TD Ameritrade in $26B stock deal

If the deal to merge the country’s two largest discount brokerages goes through the resulting behemoth will essentially dominate the “free” trading space — and make for a profitable powerhouse to compete with the big boys on Wall Street

Charles Schwab announced plans Monday to purchase brokerage rival TD Ameritrade in an all-stock $26 billion deal that will result in the San Francisco-based company moving its headquarters to Dallas-Fort Worth.

Competitive pressure has already forced brokerages to make it free for customers to trade USA stocks online, and Schwab's proposal would combine two of the biggest players in the industry.

The tie-up creates a company so big, however, that it may draw sharp scrutiny from antitrust regulators.

If the deal goes through, the combined company will have unparalleled clout as top custody service providers to independent financial advisers. Schwab and TD Ameritrade both offer "custodian" services, such as record keeping, to registered investment advisers (RIAs). Ameritrade now ranks as the third-largest player, with up to 20% of the market. It could also save up to $2 billion in annual costs.

The move is seen as a sign that price-wars and technological disruptions in the brokerage industry aren't likely to abate any time soon.

Schwab last rocked the industry less than two months ago, when it said it would do away with commissions for online trading of USA stocks and exchange-traded funds, fees that have long fueled the industry.

All major brokerages have followed suit, but fees had been falling for years.

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.

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"Focusing on expenses, current estimates are for approximately $1.8 to $2 billion run-rate expense synergies, which represents approximately 18-20% of the combined cost base", the news release said.

TD Ameritrade has relied more on commissions than some competitors, drawing 36 percent of its net revenue from commissions in 2018, compared to 7 percent at Schwab.

Charles Schwab and TD Ameritrade combined would have assets of around US$5-trillion, according to Reuters calculations. Schwab is already the dominant player in the industry with $3.8 trillion in client assets, and TD Ameritrade would add another $1.3 trillion to that pot, reports CNBC.

Under the terms of the deal, Ameritrade stockholders will receive 1.0837 Schwab shares for every share held, a 17% premium over the stock's 30-day undisturbed average price. The companies expect the transaction to close in the second half of 2020.

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.

TD Bank, which holds 43% of TD Ameritrade, will own roughly 13% of the new business.

"Partnering with Schwab on this transformative opportunity makes the right strategic and financial sense for TD Ameritrade", Boyle said in a statement.

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