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Ameritrade Deal Creates a Stronger Competitor in the Advisory Business

Online brokerage Ameritrade announced Wednesday it would acquire rival TD Waterhouse rather than accept a takeover offer from E*Trade. Ameritrade said the move would allow it to diversify away from the struggling online trading business and into financial advice. A deal has been rumored for weeks.

Online brokerage Ameritrade announced Wednesday it would acquire rival TD Waterhouse rather than accept a takeover offer from E*Trade. Ameritrade said the move would allow it to diversify away from the struggling online trading business and into financial advice. A deal has been rumored for weeks.

The new company will be named TD Ameritrade and will be headed up by Ameritrade chief executive officer Joe Moglia. Ameritrade said it expects to realize $578 million in annualized gross synergies from the deal, including cost savings and increased revenue opportunities.

"This opportunity accelerates our long-term investor strategy with access to branches and advice, while maintaining an industry leading pre-tax margin," said Moglia. "We expect that it will create significant value for shareholders by generating substantial cost synergies and deliver a more diverse revenue mix by shifting to an asset-gathering model."

It's been a tough few years for online brokerages, which have been hit by falling commissions and a steep decline in equity trading volume. Most online brokerages are suffering from overcapacity, and industry analysts do not expect trading levels to bounce back soon. Investors have become more risk-averse and are increasingly seeking investment advice.

In a report written before the deal was announced, Smith Barney analyst Prashan Bhatia predicted that Omaha, Neb.-based Ameritrade would choose to join forces with TD Waterhouse rather than E*Trade, in part because of its strong branch infrastructure and advice offering.

Whereas E*Trade has 14 branches and no meaningful presence in the RIA business, TD Waterhouse USA has 140 branches and 2,588 RIAs. A combined TD Waterhouse and Ameritrade will have 4,021 RIAs, launching it into second place ahead of Fidelity and behind Schwab. In advised assets under custody, TD Waterhouse will have $42 billion, putting it in third place behind Fidelity's $132 billion.

Of course, the acquisition will also help Ameritrade increase its share of the online trading market. According to the companies' calculations, if the two companies had operated as a combined entity for the twelve months ended March 2005, with the benefit of the expected synergies, they would have recorded average client trades per day of approximately 239,000, the highest in the industry. The combined company would also have had annual revenue of over $1.8 billion, pre-tax margins of 52 percent and client assets of $219 billion.

Under the terms of the deal, TD Waterhouse parent Toronto Dominion Bank will get a 32 percent stake in TD Ameritrade in exchange for Ameritrade's acquisition of the U.S. Brokerage business of TD Waterhouse USA. TD Bank will also acquire Ameritrade's Canadian brokerage operations for $60 million in cash. Ameritrade shareholders will get a cash dividend of $6 per share.

Ameritrade has acquired or merged with five companies since 2001, including its 2002 merger with rival Datek Online Holding Corp. That deal brought Ameritrade over 800,000 accounts and $11 billion in client assets.

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