The announcement that Charles Schwab is in discussions to buy TD Ameritrade has been made on Thursday.
The deal would create a $5 trillion in combined assets behemoth, with $3.8 trillion coming from Schwab and $1.3 trillion coming from TD Ameritrade. This is what senior analyst for Wells Fargo Mike Mayo had to say on the matter:
“This would create a Goliath in Wealth Management”
TD Ameritrade’s shares went up in premarket trading more than 24%, while Schwab’s also surged by 8%. On Thursday, Financial Times reported that Schwab is going to pay $25 billion to get TD Ameritrade.
The Deal Would Help the Industry Consolidate
Coming at a time when the industry is being massively disrupted, the deal between Schwab and TD Ameritrade would balance things. Recently, all-important brokerages have made announcements that they’re planning to go on zero commissions, with Schwab being the first to eliminate commissions in October. TD Ameritrade and Fidelity soon followed. It’s being rumored that Schwab’s CEO Walter Bettinger is going to run the joint company. Tim Hockey, the President, and CEO at TD Ameritrade has announced in July that he’s going to leave the brokerage, but not sooner than February 2020.
Schwab’s Founder Thinks the Retail Brokerage Industry Needs Consolidation
Charles Schwab, who’s the Chairman and founder at Schwab has said last month that it’s logical for the retail brokerage to become consolidated. About buying another brokerage he said,
“Certainty at the right valuation, we would do it, but we are really strong and very independent the way we do things, and so if its happens that it’s appropriate for our shareholders we will do it.”
Trades at no charge has been a blast for consumers, but it caused brokerages to find it difficult to make a profit. The most important brokerage companies were pressured to go for the zero commissions strategy back in 2013 when the Silicon Valley-based startup Robinhood has introduced the notion. Vanguard Group and J.P. Morgan Chase followed, ETrade Financial as well.
This is what JMP Securities’ financial analyst Devin Ryan had to say about consolidation:
“Consolidation thus far has been good and I think that will probably continue to be the case here. The key thing is what does the consumer get out of this. Ultimately the consumer’s been treated very well with lower commission pricing, their getting paid more on a lot of different parts of the platform.”
Schwab’s Stock Was Under Pressure After Dropping Commissions
Soon after introducing zero commission, Schwab’s stock was pressured because investors were worried the lost commission revenue that fed a quarterly revenue of up to $100 million would pressure margins. The stock recovered and brought very strong earnings in October 2019, earnings that had client assets reaching record numbers in the third quarter. More than this, only last week, Schwab proved free trading is truly efficient in bringing in new clients, by saying it has added about 142,000 new accounts in October, which is 31% more than September’s numbers and indicates a 7% jump when compared to last year’s October. These new accounts brought Schwab’s assets at $3.85 trillion.
Schwab and TD Ameritrade, the Biggest Discount Brokers
The two companies are the biggest discount brokers that trade publicly. The market cap of Schwab is $57.5 billion, while TD Ameritrade’s is $22.4 billion. The hopes of consolidation in the industry have caused Interactive Brokers to rise by 2%, whereas shares of ETrade Financial dropped by 4.5% because many expected the broker to be acquired.