As individual investors grow increasingly wary of actively trading stocks, discount brokerage TD Ameritrade put a buy order on its smaller rival, Scottrade, yesterday for $2.7 billion in cash and stock. Meanwhile, Toronto-Dominion, which owns about 42% of TD Ameritrade, is purchasing Scottrade’s online bank for $1.3 billion in cash.
The deal “joins two of the biggest names in online brokerage, a business that boomed in the late 1990s as technology stocks soared and individuals flocked online to buy stocks on their own for a fraction of what traditional brokers had charged them,” Michael Wursthorn writes for the Wall Street Journal.
“Meanwhile, since the financial crisis, stock trading has increasingly lost its appeal, and many individual investors have turned to low-cost products such as index funds for their savings and ‘robo advisers’ to automatically manage their money,” Wursthorn continues.
“The industry is feeling the pressure. TD Ameritrade, for example, said on Monday that its average client trades per day declined 7% in the three months through September,” Chad Bray points out in the New York Times.
“TD Ameritrade, based in Omaha, Nebraska, has a market value of $19.5 billion. Closely held Scottrade, based in Town & Country, Missouri, had $1.04 billion of revenue in 2015, Wells Fargo & Co. analysts led by Christopher Harris said in a report this month,” Bloomberg reports.
“The acquisition of Scottrade adds to a flurry of recent deals in an industry that’s facing pressure from lower trading volumes and sluggish revenue growth,” write Doug Alexander, Anna-Louise Jackson and Matthew Monks. “E*Trade Financial Corp. bought Aperture New Holdings Inc., parent of the futures and options trading platform OptionsHouse, in a $725 million cash deal in July, and Ally Financial Inc. purchased TradeKing Group Inc. for about $275 million a month earlier.”
It also “combines two of the United States’ ‘big five brokerages,’ the others being Charles Schwab, Fidelity Investments and E-Trade, and would leave only four major brokers operating in the marketplace,” points out Reuters’ Matt Scuffham.
“I think that the authorities in the United States are unlikely to let this pass without a pretty close look,” John Briggs, an antitrust attorney with the law firm Axinn, Veltrop & Harkrider, tells Scuffham. “I think the transaction deserves scrutiny and will get scrutiny.”
But TD Ameritrade CEO Tim Hockey was confident the combination of the two entities — with about 10 million client accounts and $1 trillion in assets, and executing around 600,000 trades per day, Scuffham reports — will pass regulatory muster.
“I still think this is a considerably competitive marketplace, that’s for sure. There are lots of opportunities for additional competitors to get into our space and continue to drive price competition,” he claims.
“This combination will allow us to leverage our strengths and increase our scale, further accelerate our asset-gathering capabilities and introduce our award-winning lineup of trading tools, products and education services to millions of new investors,” Hockey states in the release announcing the deal.
Scottrade CEO and co-founder Rodger Riney, who holds a civil engineering degree from the University of Missouri, will join the TD Ameritrade board after the deal closes, which is expected to be by the end of September 2017.
“Joining forces will enable us to offer clients an expanded array of trading tools, enhanced education resources and advanced option capabilities with broader geographic reach,” is Riney’s take on the takeover.
“In 1980, Rodger Riney left St. Louis, hopped in his 1970 Chevy Corvette and drove to Scottsdale, Ariz. There, he joined a friend in starting a little discount brokerage firm,” writes Jim Gallagher in a profile in the St. Louis Post-Dispatch. “Five years later, he bought out his partner and moved the little company back home.”
The 70-year-old billionaire is known “as the man flying a Scottrade helicopter over the skyline in TV commercials,” Gallagher writes. “In person, Riney liked to debunk his own aviator image, noting he can’t fly a helicopter, and the airborne background was faked."
“Do you know that, when I was flying that helicopter, I was really sitting in a room holding a broomstick?” he once told an acquaintance.
And in the other hand, he was no doubt holding the magic formula for developing product that was just right for its time.