Charles Schwab Corp, an early champion of retail brokerage services, on Monday announced that it would acquire rival TD Ameritrade Holding Corp for about US$26 billion amid stiffening competition to attract small investors.
The all-stock deal creates a giant that serves clients with US$5 trillion in assets and would enable the companies to cut costs at a time when they have dropped commission fees in the face of competition from newer entrants.
“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 chief executive Walt Bettinger said.
In the 1970s, the two companies revolutionized the way that small investors placed their money on Wall Street by taking on big established brokerages that set the rules for such transactions and often charged handsome fees for their services.
However, the sector has been challenged over the past few years by new entrants and by new initiatives by larger banks that take advantage of mobile platforms.
Schwab last month announced that it was removing charges of US$4.95 per trade on stocks and exchange-traded funds.
Schwab’s move spurred a similar announcement by TD Ameritrade and from E*Trade Financial Corp, another rival. The shift is a response to start-ups such as Robinhood that have offered commission-free trades for the past few years.
Besides the loss of revenue from commissions, both Schwab and TD Ameritrade have also been pressured by lower interest rates.
A note from Bank of America Merrill Lynch last week following news of talks between Schwab and TD Ameritrade predicted that the deal could spur other consolidation.
Most companies in the sector are probably “in merger discussions given the pressures on the business, this transaction, game theory, as well as the attractive synergies and accretion,” Bank of America said. “Over time, if firms are left out, it could create some pressure on those stocks, and as the distribution platforms become larger, it could also create a bit more pressure for the asset management industry.”
The companies expect to cull savings of US$1.8 billion to US$2 billion through administrative, real-estate and other costs. Integration of the two companies would take from 18 to 36 months.
Shares of TD Ameritrade on Monday increased 7.58 percent to close at US$51.78 in New York trading, while Schwab had gained 2.32 percent at US$49.31.
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