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Ameritrade to Buy TD Waterhouse

The $2.9-billion deal may signal further consolidation in the online trading industry.

June 23, 2005|Walter Hamilton | Times Staff Writer

NEW YORK — Ameritrade Holding Corp. said Wednesday that it would buy electronic brokerage rival TD Waterhouse USA in an acquisition that analysts said underscored how cutthroat competition and anemic trading volumes were transforming the beleaguered online trading industry.

The $2.9-billion deal is intended to boost earnings and profit margins at Omaha-based Ameritrade, which, like other firms, has suffered as individual investors' appetite for stock trading has waned in the aftermath of the late-1990s market bubble.

Ameritrade has clung closely to its roots as a pure online trading firm since the market downturn, while rivals such as TD Waterhouse have been more aggressive at branching into banking and other financial services.

The acquisition of TD Waterhouse would make Ameritrade a more complete player, Ameritrade Chief Executive Joe Moglia said.

"For our shareholders, where we were strong, we become stronger," Moglia said. "The areas where we want to compete are those areas where TD Waterhouse is strong."

Investors have benefited in the last year as online brokerages have slashed trading commissions to lure business. But analysts say price cuts can go only so far and have long predicted that a round of mergers would weed dozens of companies from the industry.

According to consulting firm Celent, the online brokerage industry is operating at just 35% of its capacity.

"Consolidation is good for the online brokerage industry," said Seth Dadds, an analyst at stock research firm GARP Research Corp. in Towson, Md. "It wrings out excess capacity. It could help prevent further declines in commissions."

Ameritrade shares surged almost 21% as the company said it would pay a large and uncommon dividend to shareholders -- a $2.4-billion payout amounting to $6 a share.

Of that per-share amount, Ameritrade said $5 would be financed through new borrowing, with the remaining $1 coming from cash held by TD Waterhouse. The payout was aimed in part at winning shareholder support for the deal, Ameritrade said.

Ameritrade shares closed at a nearly five-year high of $17.87, up $3.05. TD Waterhouse finished up 54 cents, or 1.24%, at $44.15.

Unlike with many acquisitions, in which investors benefit over time as a company uses its increased profitability to buy back shares, the dividend would give Ameritrade investors an immediate payoff, Chief Financial Officer Randy MacDonald said.

"Ameritrade shareholders are thrilled with the deal," MacDonald said.

In agreeing to acquire TD Waterhouse, Ameritrade spurned repeated overtures by rival E-Trade Financial Corp., which reportedly sent Ameritrade a formal letter last month seeking a buyout.

E-Trade had previously discussed combining with TD Waterhouse, but those talks foundered when TD Waterhouse's parent, Toronto-Dominion Bank of Canada, demanded control of the combined company.

Under the deal with Ameritrade, Toronto-Dominion Bank would have a 32% ownership stake in the new company. Upon closing, TD Bank would immediately offer to buy an additional 8% of the company at $16 a share, which would value the deal at $2.9 billion in all.

New York-based E-Trade still could proceed with a hostile buyout offer, although its prospects for success would be shaky because the family of Ameritrade founder J. Joe Ricketts, which would own 19% of the company after the TD Waterhouse deal, has historically sought to have its firm be the acquirer.

With an average of 239,000 stock trades a day, the new company would surpass San Francisco-based Charles Schwab Corp. as the industry leader. However, with customer assets of $143 billion, it would still trail Schwab's $1 trillion-plus in total customer assets.

The planned combination would rely heavily on cost cutting. Ameritrade would slash $378 million from the new company, or 59% of TD Waterhouse's current expense level.

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