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November 22, 2019

$26bn Schwab TD Ameritrade deal wows market

By Douglas Blakey

Make no mistake: if Schwab can snap up TD Ameritrade then it has pulled off something of a coup.

It is not just the deal of the year-in this sector it is the deal of many a year.

The market is slightly stunned but loves the potential Schwab TD Ameritrade tie up and well it might.

Schwab’ share price is up by 7.5% since news of the possible deal broke. For its part, TD Ameritrade’s share price is up by 17%.

Schwab already ranks first by market share in the discount brokerage market. Snapping up the number two player TD Ameritrade means that Schwab would tower over the sector.

Schwab has about $3.9trn in client assets and over 12 million active brokerage accounts.

TD has about $1.3trn in assets and services 11 million client accounts. In addition, it provides custodian services for more than 6,000 independent advisers.

Only privately held Fidelity, with about 30 million brokerage accounts, is in the same league.

Spare a thought meantime for shareholders of smaller rival E*Trade. Any Schwab/TD tie up is the stuff of nightmares for E*Trade and its share price promptly dropped by 10%.

Schwab TD Ameritrade: regulatory hurdles

Regulatory approval for the proposed mega deal is in no way guaranteed.

Consider for a second RIA custody assets. KBW estimates Schwab has about 50% of RIA custody assets while Ameritrade has in the region of a15%-20% market share.

But if Schwab can get over the regulatory hurdles – and that is a big if – expect Schwab to boost its earnings per share. For starters that will come through better monetisaton of Ameritrade’s sweep deposits. Then there are the synergy cost savings.

KWB suggests that an all-equity transaction could equate to 10%-15% EPS accretion for Schwab. And such a forecast may even be on the conservative side.

Schwab TD Ameritrade: Robinhood factor

The catalyst for the deal is simple: falling trading commissions, reduced fees for managing client funds and fintech disruptor Robin Hood.

Schwab kicked off October by reducing US stock, ETF and options online trade commissions to zero. Hours later TD Ameritrade followed suit.

The incumbents were responding to market disruptor Robinhood. Launched in 2013 and now boasting over 6 million users, mainly millennials Robinhood earned a $7.6bn valuation as recently as July.

Robinhood pioneered zero trading fees and offers commission-free stock and cryptocurrency trading.

And consolidation among the established incumbents represents Robinhood’s biggest hit to date.

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