The deal might be a defensive play, but could also see shareholders from both companies benefit.
Topline: With Charles Schwab announcing it will acquire TD Ameritrade for $26 billion, most analysts will celebrate the massive scale of the merger, but the all-stock transaction suggests that the deal may not be as rosy as it seems—and could well be a defensive play in response to an industry roiled by disruption.
- Many Wall Street analysts think the deal could give Schwab an edge in the price war that has roiled the industry in recent years, since it creates a giant wealth manager with more than $5 trillion in client assets ($3.8 trillion from Schwab and $1.3 trillion from TD Ameritrade).
- The agreement is expected to close in the second half of 2020 and will see TD Ameritrade stockholders receive 1.0837 Schwab shares for every share held—a 17% premium over the stock’s 30-day moving average price before the deal was announced.
- But with Schwab, which has a market cap of $60 billion, paying a stock swap transaction for TD Ameritrade, which has a market cap of $27 billion, that’s a large dilution of shares, suggesting somewhat of a defensive deal: Current Schwab shareholders will own 69% of the combined company, while TD Ameritrade’s shareholders will own 18%—and TD Bank, which owns 43% of TD Ameritrade, will own a proportionate 13%.
- If Schwab had partly paid in cash or debt, for example, its current shareholders would own a higher percentage of the merged company, while TD shareholders would get a payout and own a smaller percentage.
- “Would Schwab shareholders be better off if TD was bought with cash or debt? They probably would have been,” says Morningstar analyst Michael Wong. “That said, I’m not sure if TD Bank or Ameritrade would have agreed to a $26 billion valuation—they may have asked for a higher price.”
- “If you’re in an environment where many revenue streams are under pressure, one of the only ways to prop up your earnings is to cut expenses, and the biggest way to do that is a merger,” Wong says, while also pointing out that the all-stock transaction format means that long-term synergies from the acquisition will be fairly shared among stockholders from both companies.
Crucial quote: “I see this deal as a strategic move on the part of Schwab—one focused on long-term market dominance, rather than one architected for immediate value creation,” says Bill Capuzzi, CEO of Apex Clearing.
Tangent: Shares of both TD Ameritrade and Schwab rose on Monday, rising 6% and 1.2%, respectively. Shares of another brokerage, E-Trade Financial, were up more than 3% on news of the merger, even though many analysts had dubbed it the most attractive and likely target for an acquisition.
Big number: Kyle Voigt, an analyst with Keefe, Bruyette & Woods, believes that the deal could boost Schwab’s earnings growth 5% higher than management guidance, or up to 20% cash flow accretion three years after the deal.
Chief critic: Another big brokerage, Fidelity Investments, wasn’t too happy about the merger between two of its rivals: “Unfortunately for investors, the combination of Charles Schwab and TD Ameritrade means they will likely be doubling down on revenue practices that directly disadvantage investors, including paying extremely low cash sweep rates and taking significant payment for order flow. … These practices can easily outweigh any benefit of $0 online commissions,” said Kathleen Murphy, president of Fidelity’s personal investing business. “Investors should seriously question the benefit of a combined Charles Schwab and TD Ameritrade considering the lack of value to investors on these practices.”