The Department of Justice has approved Charles Schwab’s acquisition of rival TD Ameritrade, a regulatory green light for a deal that will combine two huge financial services firms.
Schwab agreed to acquire TD Ameritrade in November for $26 billion. Morningstar, the investment research firm, gave the deal a 75% probability that it would be approved by the DOJ, which twice requested additional information during its review.
Shares of both companies rose on the news today, while the S&P 500 fell 0.34%. Schwab gained 5.5% to $41.70 and TD Ameritrade rose 9% to $45.09. TD Ameritrade shareholders will get 1.0837 Schwab shares for each share of TD Ameritrade immediately when the deal closes, according to the regulatory filings.
"We’re gratified by the DOJ’s decision and appreciate its diligent and thorough review. We are pleased to be clearing an important milestone in our planned acquisition of TD Ameritrade and look forward to today’s scheduled votes by the stockholders of our two companies, which represent another important step toward completion of the transaction," Schwab President and CEO Walt Bettinger said in a statement.
CNBC’s David Faber broke the news about the DOJ’s approval on Thursday.
Shareholders for Schwab and TD Ameritrade have today approved the deal, which is expected to close in the second half of 2020. TD Ameritrade will become a wholly-owned subsidiary of Schwab and the integration of the two companies is expected to last 18 to 36 months.
With TD Ameritrade, Schwab will have over $5 trillion in assets and over 30,000 employees (TD Ameritrade has about 10,000 employees), and serve as a custodian to roughly 15,000 independent RIAs, which employ thousands of financial professionals.
In October last year, Schwab eliminated commissions to trade stocks and ETFs, sending waves of change throughout the industry (other brokerages announced the same shortly after). In giving up that revenue, Schwab’s stock fell 16% in two days. But share prices of competitors were crushed, especially TD Ameritrade’s, which plunged 30% in that time. Only weeks later, Schwab announced it had reached an agreement to acquire the competitor.
Equity research analysts have viewed the deal favorably.
“Without a doubt, we think that 1+1 would equal more than 2 in a combination between Schwab and Ameritrade and would create an even stronger competitor, particularly if the combined entity pushes the industry further on pricing,” wrote JMP Securities’ Devin Ryan and Brian McKenna in a note at the time.
Even before eliminating commissions to trade some securities, discount brokerages were increasingly leaning on interest income generated by the cash in client accounts. In mid-March, when the Federal Reserve lowered the federal funds rate by a full percentage point to near zero to help markets, the discount brokers were bruised. At Schwab, 60% of total revenue was tied to interest rates at the end of 2019 and Morningstar estimated Schwab’s 2020 revenue would fall by $1 billion, or 9.2% year-over-year, to just over $9.7 billion.
However, the forward-looking stock market rebounded after the downturn caused by the novel coronavirus and analysts are positive about Schwab’s future. Relative to peers, Schwab can achieve better organic growth, has more expense levers to pull, and will benefit from synergies from its merger with TD Ameritrade, researchers said in April.
Schwab has already taken steps toward preparing for the integration, including hiring Tom Bradley, the former president of TD Ameritrade’s Retail and Institutional businesses, to lead the part of Schwab’s custody business that services RIAs managing up to $100 million.
Both Schwab and TD Ameritrade host annual conferences for its RIA custody clients attended by thousands of advisors. What the acquisition will mean for Schwab’s Impact conference and TD Ameritrade’s TD LINC is publicly unknown. In April, Schwab announced that all of its conferences, including Impact which was scheduled for November, would take place virtually.