Discount broker Charles Schwab in talks to buy TD Ameritrade
Industry profits are under pressure from a shift to zero commission
Charles Schwab Corp, the largest discount broker in the U.S. financial world, is in talks to buy rival TD Ameritrade, CNBC reported, as profits in the industry come under pressure from a shift to zero commission.
CNBC did not provide any financial detail on the deal, but Fox Business pegged the value at $26 billion US, citing sources. At that price, it would be a premium of roughly 18 per cent to Ameritrade's market capitalization.
Shares of TD Ameritrade surged more than 26 per cent to $52.54 in trading before the bell. Charles Schwab shares jumped 15 per cent to $51.79.
Neither companies responded to Reuters' requests for comment.
A deal between Charles Schwab and TD Ameritrade could be seen as a response to recent disruption in the industry, where nimbler startups such as Menlo Park, California-based Robinhood are rapidly gaining market share by eliminating commissions on stock trades.
Charles Schwab was among the first few brokerages to eliminate commissions on online trading of stocks, ETFs and options, a move that was quickly followed by rivals, including Fidelity Investments, E*Trade Financial and TD Ameritrade.
Profits also stunted by low interest rates
Apart from losing trading commissions, the profitability of the online brokerages has been stunted by low interest rates, which affect the money they earn off customer balances.
Schwab earned about half of its more than $10 billion in revenue in 2018 from interest earned. That is under pressure as rates go lower amid talk of the potential for negative interest rates, making other sources of revenue more important.
"This is largely about scale," Argus Research analyst Stephen Biggar said. "I believe a merger could present substantial cost synergies."
If the deal goes through, the combined entity would control a majority of a market that has been ravaged by price wars between the biggest players.
The combined company, expected to be led by Schwab's Chief Executive Officer Walt Bettinger, will have total assets of $5 trillion.
I do want to be crystal clear, we are on offence at Schwab. We're not resting on our laurels.- Walt Bettinger, Charles Schwab CEO
Bettingger had indicated last month that the company would aggressively consider strategies that would give it scale.
"I do want to be crystal clear, we are on offence at Schwab. We're not resting on our laurels … We're pushing ahead aggressively. Our efforts include an emphasis on scale and efficiency," Bettinger said.
A potential deal could give Schwab an edge in the price war that has plagued the ultra-competitive industry and attract scrutiny from antitrust regulators.
The deal could also force E*Trade, the third largest discount broker, to look for possible acquisitions. Shares of E*Trade were down nearly 5 per cent following the CNBC report.