Charles Schwab plans to buy TD Ameritrade, seizing on turmoil

First, Charles Schwab Corp. upended the retail brokerage business by cutting commissions to zero. Now it’s seizing on the turmoil it unleashed to acquire one of its biggest rivals, TD Ameritrade Holding Corp.

Just weeks after Schwab stunned competitors by letting customers trade stocks for free, the company is moving to tighten its grip on the industry with talks to acquire TD Ameritrade, according to a person familiar with the matter.

The deal would give Schwab, the nation’s original discount broker, even more sway over the industry it pioneered nearly half a century ago — and an edge in the intensifying battle for ordinary investors’ dollars, and the investment advisor business. The tie-up would result in a $5-trillion titan that could attract antitrust scrutiny.

“An acquisition of TD Ameritrade would expand Schwab’s roster of active traders and solidify its leading position serving independent advisors,” said David Ritter, an analyst with Bloomberg Intelligence.

A sale could be announced as early as this week, the person said, asking not to be identified because the discussions were private. The companies didn’t immediately respond to emails and phone calls seeking comment.

TD Ameritrade stock leaped 16.9% on Thursday, the most since 2008. Schwab shares climbed 7.3%.

Shares of ETrade Financial Corp., which analysts have speculated TD Ameritrade might want to buy, sank 9.3%. A deal between its two rivals could leave smaller brokerage ETrade contending with a more formidable competitor than ever.

Schwab’s move to zero commissions forced other brokerages to follow suit and triggered a slump in those firms’ stocks, with TD Ameritrade among the hardest hit. It swept away a revenue stream and rekindled speculation that online brokerages might have to cut deals to survive the increased industry pressure.

TD Ameritrade has relied more on commissions than some competitors, drawing 36% of its net revenue from commissions in 2018, compared to 7% at Schwab.

For founder Charles Schwab, ending commissions has been a longtime goal.

“I hated commissions,” he said at the Impact 2019 conference in San Diego this month. “I hated them then. I hate them now. I took them away.”

He had also hinted he was open to dealmaking.

“I don’t know whether we’ll be successful in that pursuit, but in the industry you’re going to see more consolidation, more firms getting together,” he in an interview with Bloomberg Radio in October. “You just have to have that scale and volume. So we’re prepared to do it if the opportunity arises. If not we’re perfectly happy to go it alone.”

A deal between Schwab and TD Ameritrade could face antitrust scrutiny, Keefe, Bruyette & Woods analyst Kyle Voigt wrote in a client note Thursday.

Schwab is the No. 1 player in the market for safeguarding assets managed by registered investment advisors, followed by Fidelity Investments, Voigt said. Schwab may hold about half of the market, while TD Ameritrade may have around 15% to 20%, he said.

Although fees are going down for consumers, antitrust officials will focus on whether the deal will mean less competition for the interest paid to investors on their accounts and whether fees on other services could rise, said Robert Litan, a partner at Korein Tillery and a former official with the Justice Department’s antitrust division. He said the tie-up is likely to be reviewed by the Justice Department instead of the Federal Trade Commission, which also reviews mergers.

“The intense competition in the industry has forced them to go to zero commissions, but that doesn’t mean that the market still isn’t susceptible to having consumers hurt as a result of further consolidation,” he said.

An acquisition would come at a time of transition for TD Ameritrade. The Omaha-based brokerage said in a surprise announcement in July that Chief Executive Tim Hockey would leave no later than the end of February 2020, rekindling questions of whether it would pursue a deal. Hockey denied that his departure had anything to do with a potential deal at the time. Toronto-Dominion Bank, Canada’s second-largest lender by assets, owns a 43% stake in TD Ameritrade.

Massa and Monks write for Bloomberg.