Charles Schwab’s SCHW deal to acquire TD Ameritrade Holding AMTD for $26 billion has received consent from the U.S. Department of Justice (“DOJ”). The all-stock deal, announced in November 2019, had raised antitrust concerns as it will make Schwab one of the prominent industry players.
Nonetheless, at that time, Schwab President and CEO Walt Bettinger had downplayed the antitrust risks. He had said, “We have numerous competitors, many of which are far larger than us today and far larger than a combined organization. They’re going to continue to come right after us, as they are now in all aspects of the business.”
In another development, shareholders of both Schwab and TD Ameritrade approved the transaction, with more than 99% of votes cast in favor of the deal.
Following these favorable developments, shares of Schwab and TD Ameritrade rallied 5.5% and 9%, respectively yesterday.
Further, the proposal to issue new Schwab common shares to TD Ameritrade stockholders as consideration for the acquisition was overwhelmingly approved by the shareholders.
Steve Boyle, interim president and CEO, TD Ameritrade said, “We are pleased that our shareholders are supportive of this transformative opportunity to create the ultimate client experience for retail investors and independent registered investment advisors.”
Also, votes were cast in favor of “an amendment to the fifth amended and restated certification of incorporation of Schwab,” which will lead to creation of a new class of non-voting common stock that will be issued to Toronto-Dominion Bank TD – having nearly 43% stake in TD Ameritrade at present.
Therefore, per the Schwab charter amendment, the number of authorized shares of Schwab will increase by 300 million, and it will be authorized to issue 300 million shares of non-voting common stock, each with a par value of $0.01 per share.
By clearing these hurdles, the deal is a step closer to completion though it still requires other regulatory approvals. The deal is expected to close in the second half of 2020 and integration will likely take another 18-36 months.
Online brokerage industry is undergoing massive operational upheavals. Last year, several leading players with Schwab at the forefront introduced commission-free trading with an aim to gain further market share. In fact, these brokerage firms witnessed a significant rise in new accounts during the first quarter 2020 as stock markets experienced heightened volatility amid coronavirus-induced mayhem.
Following such disruptions, consolidation was expected in the industry. In February 2020, major investment bank Morgan Stanley MS inked a deal to acquire E*Trade Financial. The move is in sync with Morgan Stanley’s efforts to diversify revenues.
Notably, combined Schwab-TD Ameritrade will create a behemoth in the online brokerage space, with combined client assets worth more than $5 trillion and serving nearly 24 million brokerage accounts. It is expected to result in substantial strategic benefits – earnings and cost synergies – for the combined firm.
Over the past six months, shares of both Schwab and TD Ameritrade have lost 14.9% and 11.8%, respectively. This compares with 8.3% decline of the industry.
At present, Schwab carries a Zacks Rank #2 (Buy) and TD Ameritrade has a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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