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Charles Schwab and TD Ameritrade set to combine in $26B merger

Just months after slicing commission fees, Charles Schwab has agreed to acquire rival TD Ameritrade for $26 billion, representing a major consolidation in the discount broker industry.

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This article was originally published on Nov. 22. It was updated on Nov. 25 to reflect that Charles Schwab and TD Ameritrade had confirmed the deal announcement with a press release.

Less than two months after bucking precedent by eradicating commission fees, Charles Schwab has agreed to acquire smaller competitor TD Ameritrade in an all-stock deal worth about $26 billion. The deal would create a brokerage giant with over $5 trillion in assets under management and about 24 million client accounts.

Walter Bettinger, Schwab’s CEO and president for more than a decade, is reportedly expected to take the helm of the combined company. Ameritrade CFO Stephen Boyle has been named interim CEO and president of the soon-to-be acquired company, signaling the departure of former Ameritrade CEO and president Tim Hockey.

The merged company will be headquartered in Westlake, TX. Currently, Schwab is based in San Francisco, and Ameritrade is based in Omaha.

“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,” Bettinger said in a press release.

The purchase puts Schwab among the top brokerage houses by assets under management. BlackRock remains on top, with about $6.84 trillion under management, followed by The Vanguard Group, which manages about $5.6 trillion. Schwab already held third place, overseeing about $3.85 trillion, but the addition of Ameritrade’s $1.3 trillion in AUM would nonetheless bump Schwab’s status.

Among publicly traded discount brokers, Schwab and Ameritrade lead the pack. Schwab currently boasts a market cap of about $61.8 billion, while TD Ameritrade is valued at some $26.1 billion. Combined, the firms recently booked total annualized revenues of about $17 billion and pre tax profits of about $8 billion.

The potential move underlines Schwab’s recent tenacity. In October, the pioneer of discount brokerage services nixed commissions for online trades in an effort to compete against app-based brokers like Robinhood, which raised a $323 million Series E in July at a whopping $7.6 billion valuation. Schwab’s rivals, including TD Ameritrade, E-Trade and Fidelity Investments, followed suit by dropping fees in the hours and days after.

While Schwab is large and diversified enough to weather the $90 million to $100 million quarterly revenue loss that it will incur from removing fees, the decision poses a threat to Ameritrade. The latter, which still makes most of its money through online trading, stands to lose about $220 million to $240 million in quarterly revenue from the elimination of commissions. A buyout, however, would protect TD Ameritrade, while also boosting Schwab’s base.

Per some analysts, the merger could prompt a wave of consolidation across the industry, as competitors fight to remain relevant. Last month’s commission-cutting proves that when Schwab acts, others listen.

But the combination of Schwab and TD Ameritrade will require regulatory approval and is likely to spur anti-competition concerns. The two companies already corner the registered investment advisor business, and a deal would further limit choices for those clients. Indeed, big-time mergers (like T-Mobile’s $26.5 billion buyout of Sprint) must undergo rounds of legislative approval that can extend the acquisition process by months.

Traders seemed to like the news when it was first reported last week. Schwab’s shares (NYSE: SCHW) jumped nearly 12% in after-hours trading on Wednesday, opening at $50.02 on Thursday morning. TD Ameritrade’s stock (Nasdaq: AMTD) shared a similar fate, with shares soaring almost 25% in after-hours trading Wednesday to open Thursday at $51.61.

On Monday morning, Schwab’s shares were up more than 1%, while Ameritrade’s shares were up some 6%.

Featured image via Mike Mozart/CC by 2.0

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    Written by Eliza Haverstock
    Eliza Haverstock was a PitchBook writer covering venture capital, startups, and private equity.

    A graduate of the University of Virginia where she majored in history and economics, she’s also a native of the Washington, DC, area. Previously, Eliza worked as a news editor for her college paper, The Cavalier Daily, and interned as an industrials reporter for Bloomberg in New York.
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