Charles Schwab to Purchase TD Ameritrade
The Charles Schwab Corporation and TD Ameritrade Holding Corporation today announced that they have entered into a definitive agreement for Schwab to acquire TD Ameritrade in an all-stock transaction valued at approximately $26 billion. Under the agreement, TD Ameritrade stockholders will receive 1.0837 Schwab shares for each TD Ameritrade share, which represents a 17% premium over the 30-day volume-weighted average price exchange ratio as of November 20, 2019.
Schwab President and CEO Walt Bettinger said, “We have long respected TD Ameritrade since our early days pioneering the discount brokerage industry, and as a fellow advocate for investors and independent investment advisors. Together, we share a passion for breaking down barriers for investors and advisors through a combination of low cost, great service, and technology. With this transaction, we will capitalize on the unique opportunity to build a firm with the soul of a challenger and the resources of a large financial services institution that will be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys.”
The combination brings together two leading firms with proud and similar histories of making investing more accessible to all. More than 40 years ago, Schwab and TD Ameritrade started out as alternatives to traditional Wall Street brokerages. They helped lead a revolution to become the preferred model for full-service investing among tens of millions of direct investors and the go-to providers of custodial and consulting services for thousands of independent investment advisors. The firms’ mutual respect and complementary cultures will help Schwab successfully integrate TD Ameritrade into its future operations.
With today’s announcement, the TD Ameritrade Board of Directors has suspended its previously disclosed CEO search, naming Stephen Boyle, TD Ameritrade EVP and CFO, as the company’s interim President and CEO. Mr. Boyle will assume leadership of the company effective immediately, guiding its management team through its fiscal 2020 plan and the proposed integration with Schwab.
“Partnering with Schwab on this transformative opportunity makes the right strategic and financial sense for TD Ameritrade,” Mr. Boyle said. “We share a common history—a journey since 1975 that has made Wall Street more accessible and financial dreams more attainable for millions of Americans. Our associates are fiercely proud of that legacy and all that we have accomplished to make TD Ameritrade one of the premier firms in financial services. Now we look to join forces with a respected firm like Schwab that shares our relentless focus, and to do more than we could do apart. Together, we can deliver the ultimate client experience for retail investors and independent registered investment advisors. We can continue to challenge the status quo, pooling our resources and expertise to transform lives—and investing—and deliver sustainable, long-term value to our many stakeholders.”
Mr. Bettinger added, “One of Chuck Schwab’s ambitions has always been to build a strong and independent Schwab that would be around to serve clients for many years in the future. We believe the combination of our two great companies positions us to be competing and winning in the investment services business for the long run—the very long run.”
This transaction creates significant strategic benefits for the combined organization and is expected to deliver attractive returns for the owners of both companies, while further improving the investing and trading experience of both Schwab and TD Ameritrade clients. It allows Schwab to continue to add further scale on top of its organic growth, helping to drive sustainable, profitable growth and long-term value creation. More specifically, the acquisition will add to Schwab approximately
12 million client accounts, $1.3 trillion in client assets, and approximately $5 billion in annual revenue. This added scale is expected to result in lower operating expenses as a percentage of client assets (“EOCA”), help fund enhanced client experience capabilities, improve the company’s competitive position and further its financial success and diversification of revenue. The resulting combined firm is expected to serve 24 million client accounts with more than $5 trillion in client assets; taken together, the two firms recently generated total annualized revenue and pre-tax profits of approximately $17 billion and $8 billion, respectively.
The transaction has been unanimously approved by the Boards of Directors of Schwab and TD Ameritrade, as well as the Strategic Development Committee of TD Ameritrade’s Board—a committee comprised solely of outside, independent directors that was established by the Board of Directors of TD Ameritrade to oversee and conduct the process and all negotiations concerning the transaction on behalf of the Board. Post-closing, The Toronto-Dominion Bank (“TD Bank”), which currently holds approximately 43% of TD Ameritrade’s common stock, will have an estimated aggregate ownership position of approximately 13% in the combined company, with other TD Ameritrade stockholders and existing Schwab stockholders holding approximately 18% and 69%, respectively. TD Bank’s voting stake will be capped at 9.9%, with the balance of its position held in a new, non-voting class of Schwab common stock. Additional details regarding stockholder matters, including upcoming votes, will be provided in the subsequent merger proxy materials.
In addition, this transaction included a renegotiation of the Insured Deposit Account (IDA) agreement by Schwab and TD Bank, to be effective at closing. The agreement was extended for a 10-year term beginning in 2021, and the servicing fee paid by Schwab on balances within the IDA was reduced by 10 basis points. Over time, Schwab will have the option to reduce balances routed to the IDA sweep program, subject to certain restrictions. This arrangement provides flexibility to optimize related revenue as those balances are shifted to Schwab.
With anticipated synergies, the deal is expected to be 10-15% accretive to GAAP EPS and 15-20% accretive to Operating Cash EPS in year three, post-close. Focusing on expenses, current estimates are for approximately $1.8 to $2 billion run-rate expense synergies, which represents approximately 18-20% of the combined cost base. Some of the expense synergies the combined firm expects to realize will come from the elimination of overlapping and duplicative roles. Additional synergies are expected to be achieved through real estate, administrative and other savings. Details on these synergies will be shared at a later date, once the integration process is underway.
The transaction is subject to customary closing conditions, including receipt of applicable regulatory approvals and approval by the stockholders of both companies. Closing is also subject to a “majority of the minority” TD Ameritrade stockholder approval condition, which means that the transaction must be approved by holders of a majority of the outstanding TD Ameritrade shares, other than TD Bank and certain other shareholders of TD Ameritrade that have entered into voting agreements. TD Bank and certain stockholders of TD Ameritrade (who collectively own approximately 52% of the TD Ameritrade shares), and certain stockholders associated with Charles R. Schwab (who own approximately 10% of the Schwab shares), have agreed to vote their shares in favor of the transaction. The parties expect the transaction to close in the second half of 2020, and integration efforts to begin immediately thereafter.
Following the close of the transaction, TD Bank will have the right to name two new seats on the Schwab Board of Directors and TD Ameritrade will name a single director.
Credit Suisse Securities (USA) LLC served as financial advisor and Davis Polk & Wardwell LLP acted as legal advisor to The Charles Schwab Corporation. PJT Partners LP and Sandler O’Neill + Partners LP served as financial advisors and Wachtell, Lipton, Rosen & Katz acted as legal advisor to the Strategic Development Committee of the Board of Directors of TD Ameritrade.
Integration Process, New Headquarters
The integration of the two firms is expected to take between 18 and 36 months, following the close of the transaction. Schwab has named Senior EVP and COO Joe Martinetto to oversee the integration initiative, assisted by a team of experts from both Schwab and TD Ameritrade.
As part of the integration process, the corporate headquarters of the combined company will eventually relocate to Schwab’s new campus in Westlake, Texas. Both companies have a sizable presence in the Dallas-Fort Worth area. This will allow the combined firm to take advantage of the central location of the new Schwab campus to serve as the hub of a network of Schwab branches and operations centers that span the entire U.S., and beyond. Any additional real estate decisions will be made over time as part of the integration process.
Schwab was founded in San Francisco and has maintained a longstanding commitment to the Bay Area, which will continue. A small percentage of roles may move from San Francisco to Westlake over time, either through relocation or attrition. The vast majority of San Francisco-based roles, however, are not anticipated to be impacted by this decision. Schwab expects to continue hiring in San Francisco and retain a sizable corporate footprint in the city.
Enhanced Value Proposition for Clients
Clients of TD Ameritrade and Schwab alike should benefit from the broader and deeper array of services. The combination will bring together the best of the two firms’ innovative and client-centric platforms, products and services. These include leading trading and wealth management platforms, custody platforms and tools, investor education, award-winning service, retirement services, banking, asset management, and a unique satisfaction guarantee. Schwab believes the combination will enhance its “no trade-offs” approach to value, increasing its ability to compete for new clients and deepen relationships with existing clients.
Mr. Bettinger added, “Schwab’s strong track record of performance is based on a simple but powerful strategy: viewing the world ‘Through Clients’ Eyes.’ We know that clients today have high and rising expectations, and we believe this transaction will help Schwab offer its clients an even broader range of award-winning services well into the future.”
Both firms have been widely recognized for their superior service and client offerings:
- Schwab was ranked #1 in Customer Satisfaction with DIY Self-Directed Investors by J.D. Power; Charles Schwab Bank ranked Highest in Customer Satisfaction with Direct Retail Banking in the J.D. Power 2019 Direct Banking Satisfaction Study; Schwab was named #1 Broker Overall in the 2019 Investor’s Business Daily Best of the Online Brokers Survey; and StockBrokers.com ranked Schwab “Best in Class” Overall in 2019.
- TD Ameritrade was ranked the Best Online Broker for 2018 in the Kiplinger’s Personal Finance Best Online Brokers review. Contributing to the #1 ranking were top scores for Research, Tools, and User Experience—each coming in at 5 stars—as well as high scores for Mobile App (4.5 stars) and Advisory Services (4 stars). Also, TD Ameritrade was named #1 Overall Broker in the StockBrokers.com 2019 Online Broker Review, and was rated #1 in nine different categories.
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