Charles Schwab to buy TD Ameritrade for $26 billion, reports say

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Deal would create a company with roughly $5 trillion in combined assets.

Charles Schwab Corp. is buying TD Ameritrade Holding Corp. for $26 billion, with a deal expected to be announced Thursday morning, Fox Business reports, citing unidentified people familiar with the situation.

Shares in Charles Schwab reversed an earlier decline in premarket trading and are up 2.4%, while TD Ameritrade reduced some of the earlier gains and is up 17%. Neither company responded immediately to emails and phone calls seeking comment.

A deal would create a firm with roughly $5 trillion in combined assets, consolidating an industry under pressure from a price war that escalated last month when Schwab announced plans to eliminate commissions for U.S. stocks, exchange traded funds and options.

The move forced other brokerages to follow suit and triggered a slump in the shares of such firms, with TD Ameritrade among the hardest hit.

TD Ameritrade has lost 11% since then, valuing the company at $22 billion. Schwab gained 7% in the same period, giving it a stock market value of $57 billion.

CNBC reported earlier the firms were in talks, with a deal likely as soon as today.

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

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

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

Shares of ETrade Financial Corp., which analysts had speculated TD Ameritrade might want to buy, fell 9%. 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 the shares of firms, with TD Ameritrade among the hardest hit. Eliminating commissions 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 and 17% at ETrade.

For founder Charles Schwab, ending commissions has been a longtime goal. “I hated commissions,” he said at the Impact 2019 conference in San Diego. “I hated them then. I hate ’em now. I took ’em away.”

Mr. Schwab had also hinted he was open to deal-making.

“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 said 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 the two companies could face antitrust scrutiny, Keefe, Bruyette & Woods analyst Kyle Voigt wrote in a client note Thursday.

Schwab and TD Ameritrade are both top custody service providers to independent financial advisers, which could give authorities pause. Mr. Voigt estimates Schwab has about a 50% market share of registered investment adviser custody assets, while TD Ameritrade may have up to 20%.

An acquisition would come at a time of transition for TD Ameritrade. The Omaha-based brokerage said in a surprise announcement in July that CEO Tim Hockey would leave no later than the end of February 2020, which rekindled questions of whether the company would pursue a deal. Mr. 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.

Todd Rosenbluth, director of ETF research at CFRA Research, said that a tie-up of the two firms could help address the burn of zero commissions with increased scale.

“It would reduce the likelihood that investors bounce around,” he said. “They’d have a go-to destination.”

Mr. Rosenbluth added that the same principle would apply for independent advisers, who increasingly choose between the two firms for clearing and trading services.

“There’s scale benefits for them to provide,” he said.

[More: How free trading threatens the RIA business model]