E*Trade/TD Ameritrade?

ETD Trade: This morning’s WSJ reports:

The online brokerage industry, which underwent a wave of consolidation after the bursting of the dot-com bubble, may be headed for another shakeout, with giants TD Ameritrade Holding Corp. and E*Trade Financial Corp. holding merger discussions.

A merger of the two online brokers would create a dominant player in what has been a highly fragmented industry, with dozens of smaller companies battling for market share. As a result, it could reduce some of the fierce competition that has benefited consumers by driving down the cost of online trading but has squeezed the industry by chipping away at its profit margins.

There is some question as to whether this will get through the FTC.

The bigger concern is that this is merely a temporary fix. Neither company has responded well to the change in individual investor behavior and character since the 2000 market crash.   

Management of both firms are strongly advised to read our 2005 white paper (excerpted here: On Line Trading: A Business Plan for the future). It accurately foresaw the decreased trading volumes and increased competition in the online trading  space, and is even more relevant of a biz plan today than when it was written.



TD Ameritrade In Merger Talks With E*Trade
August 22, 2007; Page A1

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What's been said:

Discussions found on the web:
  1. James Bednar commented on Aug 22

    In the spirit of naming combinatorics, let me be the first to suggest a identify for the new firm..

    TD Amer-E*Trade


  2. michael schumacher commented on Aug 22

    and if it is allowed then we all can expect yet another dumping of shares by Moglia in his never ending ploy to remain diversified….

    Does the Mafia run Wall Street again, I mean now??


  3. techy2468 commented on Aug 22

    wait a second are you saying this merger is a bad idea……i thought that todays market rise was because of mergers like this…..and of course, the rate cut promise by FED

  4. Northern Observer commented on Aug 22

    But do the Canadians get to control the thing. Muh wha ha ha ha ha ha ha, eh?

  5. mhm commented on Aug 22

    Someone please bring Datek back to life. It was fast, reliable and had backup login servers.

    This morning TD Ameritrade was so slowwww I missed a couple of trades…

  6. Susanne Craig commented on Aug 22

    The online brokerage industry, which underwent a wave of consolidation after the bursting of the dot-com bubble, may be headed for another shakeout, with giants TD Ameritrade Holding Corp. and E*Trade Financial Corp. holding merger discussions.

    A merger of the two online brokers would create a dominant player in what has been a highly fragmented industry, with dozens of smaller companies battling for market share. As a result, it could reduce some of the fierce competition that has benefited consumers by driving down the cost of online trading but has squeezed the industry by chipping away at its profit margins.

    As of the end of June, E*Trade had 4.7 million brokerage and banking accounts, TD Ameritrade had 6.3 million such accounts, and Charles Schwab Corp., now the largest online broker, had about 6.9 million. Merrill Lynch & Co., in contrast, has more than 7 million customer accounts.

    A spokeswoman for E*Trade said the firm’s management team has consistently stated it believes there is “tremendous value in consolidation that aligns business strategy and operational synergies and will do what is in the best interest of its customers.” A TD Ameritrade spokeswoman said, “We have talked and continue to talk to peers in the industry.”

    E*Trade and TD Ameritrade have been in serious discussions for weeks but aren’t yet close to a deal, according to people familiar with the matter. They have discussed an alliance several times in previous years but have never managed to make it to the altar. This time, however, they may feel more pressure to reach a deal. Two hedge funds with big stakes in TD Ameritrade have publicly urged the two companies to talk.

    The two funds — Jana Partners LLC and S.A.C. Capital — have argued that Toronto-Dominion Bank, which owns 39% of TD Ameritrade, opposes a merger of the company because its interests aren’t fully aligned with other shareholders. The funds, which own a combined 8.4% of TD Ameritrade, contend that the Canadian bank wants to use the online broker, which is based in Omaha, Neb., to grow in the U.S. and isn’t necessarily focused solely on maximizing shareholder value. TD Bank has publicly disagreed with that characterization of its position.

    Even so, Jana and S.A.C. successfully pressured TD Ameritrade to remove TD Bank’s chief executive from the online broker’s mergers and acquisitions committee in early July.

    It isn’t clear what a merger deal between E*Trade and TD Ameritrade would be worth or how it might be structured. One person familiar with the talks estimated a deal could create a company valued at as much as $20 billion, given the cost saving that could result from uniting both company’s accounts on a single computer system. The consolidation would make the cost of adding new clients minimal.

    Yesterday, E*Trade shares rose 93 cents to close at $15.57 in 4 p.m. composite trading on the Nasdaq Stock Market. TD Ameritrade, which also trades on Nasdaq, closed at $16.35, up 17 cents. TD Ameritrade currently carries a market capitalization of $9.74 billion while E*Trade’s stock value is $6.6 billion.

    A person familiar with the merger talks said the discussions currently are focused on making sure both online brokers agree on strategy. Ameritrade historically has been known as king of the low-cost trade while E*Trade has pursued a more diversified strategy and even owns a bank. In recent years, though, both firms have become more focused on offering customers an array of products.

    “Both companies are looking to add client assets and diversify their operations away from trading commissions, so on many levels a merger makes sense,” says Rich Repetto, an analyst at boutique brokerage firm Sandler O’Neill + Partners LP.

    Since the Internet bubble burst, the sector has been beset by falling commissions. New York-based E*Trade, for instance, now charges between $6.99 and $9.99 a trade. In 1997, by contrast, Schwab Corp. made headlines by offering the then-bargain price of $29.95 for online trades of up to 1,000 shares. At the time, Schwab insiders worried that such a price cut — trades had cost roughly three times that amount before — would eat up profits.

    Today, the competition for low-cost trades is even fiercer. Some banks, including Bank of America Corp. now offer free online trades for customers who meet certain minimum-balance requirements. In Bank of America’s case, customers must have at least $25,000 in deposits to qualify.

    With private-equity firms shrinking from the acquisition scene amid the current credit crunch, traditional mergers among industry rivals like TD Ameritrade and E*Trade may be the surest path for such companies to reach a deal. Such a deal might also be subjected to less antitrust scrutiny now under the business-friendly Bush administration than if it came up for review under President Bush’s eventual successor.

    In recent years, a number of deals between major competitors have passed antitrust muster, including appliance maker Whirlpool Corp.’s acquisition of Maytag Corp. and the merger of the nation’s largest and second-largest hog producers, Smithfield Foods Inc. and Premium Standard Farms Inc.

    The credit crunch, however, has added a new wrinkle to the TD Ameritrade-E*Trade talks: Last week E*Trade was hit with rumors that the quality of its mortgage portfolio, a growth engine for the company in recent years, was weak. The company’s stock’s dropped 28% last Thursday before rebounding the same day after E*Trade assured the market that despite some volatility, “the financial health of the company is sound.”

    Still, sources close to the negotiations say the quality of E*Trade’s mortgage portfolio is an issue TD Ameritrade is watching closely.

    Eventually, those involved in the talks say they expect the sticking points to be familiar ones: The two sides will need to agree on a management team to run the combined company and, on a related note, what degree of control Ameritrade shareholder TD Bank would have once the two brokerage firms were combined.

    Picking a management team won’t be easy. Both companies are run by forceful chief executives: Mitch Caplan at E*Trade and Joe Moglia at TD Ameritrade. Control was a point of contention during Ameritrade’s 2005 talks with TD Bank. Eventually Mr. Moglia got the CEO post and TD Bank acquired five of the company’s 12 board seats.

    A person familiar with the matter said the two companies were talking before hedge funds Jana and S.A.C. went public with their call for talks between the pair. This person said the move actually slowed down negotiations because TD Ameritrade has been working to address some of the concerns raised by the funds, such as removing the TD Bank CEO from its merger and acquisition committee.

    A deal between E*Trade and TD Bank would put added competitive pressure on Schwab. During a conference call with analysts in July, Schwab Chief Executive Charles Schwab threw cold water on speculation his firm might merge, suggesting that its internal growth opportunities were superior to acquisition-related ones. Yesterday, a Schwab spokeswoman declined to comment.

    Schwab, long criticized by analysts for its high expenses, has sought in recent years to cut costs. It also recently named Walt Bettinger as president and chief operating officer to help assuage some concerns that had been brewing on Wall Street about the depth of Schwab’s management bench. In another move aimed at getting its house in order, Schwab last year sold U.S. Trust to Bank of America. Schwab initially bought U.S. Trust in hopes of retaining more wealthy clients, but the marriage never worked, in part because of culture clashes between the two companies.

  7. David commented on Aug 22

    Barry, I reviewed your post on updating the online trading firms’ business plans and there are some interesting points.

    While I’m no expert on active trading or the brokerage business, let me add one or two others.

    The one thing that I’d bet would really please investors is the ability to trade more products online, worldwide.

    If more online brokers/web based trading platforms would offer the array of options that an Interactive Brokers seems to have, than that might create a lot of interest among a certain segment of forward-thinking investors. Only problem with IB seems to be their lack of customer service (from what I’ve heard, not a client), so there would have to be a marriage of products and customer service/reliability.

    Active Trader magazine had an article on this in their recent September issue. If I recall correctly, TD Ameritrade was one of the firms making excuses about their lack of overseas trading capabilities, putting it down to a lack of interest among most clients.

    Personally, I think these offerings will be key for attracting investor interest in the future. According to some, the capability for overseas trading should have already been widely available by now.

    Since, I’ve said so much already, I’ll just make one more quick point.

    When a company like E-Trade takes over an excellent online chart site/community like Clearstation, they should try doing something with it!

    A useful stock screener that combines MSN Deluxe screener’s fundamental fields with Clearstation’s technical prowess would be a fabulous tool. They could have come up with something like StockPickr as well, they’ve had the social angle going on Clearstation since the site was founded. No publicity though, as far as I can tell.

  8. David Lloyd-Jones commented on Aug 22

    Note that TD are not good at what they do.

    I had an account with them for several years, and after I started using it in August of 2006 they got 13 or 14 trades right out of 41. The rest they managed to bugger up with a relentless dedication to innovation that showed up as a new screw-up every day.

    I found myself in the very odd situation of having one part of the comapn paying me $450 for an afternoon of advice on how to make things better, while another guy was terminating my accounts (and my daughters’) because I had called one of their employees, accurately, a nit-wit.

    This will probably end in litigation.

    In the meantime, I suggest that owners of E-Trade might want to find more competent partners.

  9. michael schumacher commented on Aug 22

    Beware of Stephen Cohen and his “maximizing shareholder value” crap. It’s his, and Carl ICahn’s, standard line for setting up a stock for take over………at much lower prices.

    Tell the people who bought WCI about shareholder value on SAC’s advice in March of this year.


    Love that “value”………those debt bonds (the real value IMO) are really “valuable” and will be bought by SAC and Icahn for pennies.


  10. bjk commented on Aug 22

    TD Ameritrade killed the fascinating Ameritrade Index. Nothing but a dead link now. It taught two lessons: retail traders buy a) volatility and b) declines. If the market is down, the retail traders are in their buying. And if it goes up, they’re selling.

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