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Charles Schwab Agrees $26 Billion TD Ameritrade Acquisition

Tom Burroughes Group Editor November 25, 2019

Charles Schwab Agrees $26 Billion TD Ameritrade Acquisition

Charles Schwab, founded in San Francisco, will eventually move its HQ to a new center in Texas, perhaps emblematic of a shift in corporate locations in the US.

Charles Schwab has, as widely trailed in recent reports, agreed to buy TD Ameritrade, bolstering the former's status as the dominant US discount-brokerage firm. The firms have agreed a $26 billion all-stock transaction.

The deal, if approved, will see Charles Schwab move its headquarters from San Francisco to Westlake, Texas. TD Ameritrade already has a large presence in the Lone Star State. The shift in some ways fits with a pattern of businesses quitting California for less highly taxed parts of the US, such as Texas and Florida.

Shares in Charles Schwab were trading at $48.76, rising 1.2 per cent on the day today. 

Under the agreement, TD Ameritrade stockholders will receive 1.0837 Schwab shares for each TD Ameritrade share, which represents a 17 per cent premium over the 30-day volume weighted average price exchange ratio as of November 20, 2019, Charles Schwab said in a statement today.

As a result of today's announcement, TD Ameritrade has suspended its previously disclosed chief executive search, naming Stephen Boyle, TD Ameritrade EVP and CFO, as the company’s interim president and CEO. Boyle will assume leadership of the company effective immediately, guiding its management team through its fiscal 2020 plan and the proposed integration with Schwab, the statement said.

With costs, about $1.8 to $2 billion "run-rate expense synergies", or about 18 to 20 per cent of the combined cost base, will be achieved. Some of the savings will come from removing overlapping job roles, administration, real estate and other savings. Details on these will be released at a later date.

Charles Schwab gains about 12 million client accounts from the deal as well as $1.3 trillion in client assets, and approximately $5 billion in annual revenue. The firms said the acquisition will be 10-15 per cent accretive to GAAP-measured earnings per share and 15-20 per cent accretive to operating cash EPS in year three, after the deal is closed.

Sheer scale
"This added scale is expected to result in lower operating expenses as a percentage of client assets, help fund enhanced client experience capabilities, improve the company’s competitive position and further its financial success and diversification of revenue. The resulting combined firm is expected to serve 24 million client accounts with more than $5 trillion in client assets; taken together, the two firms recently generated total annualized revenue and pre-tax profits of approximately $17 billion and $8 billion, respectively," the San Francisco-headquartered firm said.

The firms' boards unanimously approved the transaction. Once the agreement is closed, The Toronto-Dominion Bank, which holds about 43 per cent of TD Ameritrade’s common stock, will have an estimated aggregate ownership position of approximately 13 per cent in the combined company, with other TD Ameritrade stockholders and existing Charles Schwab stockholders holding approximately 18 per cent and 69 per cent, respectively.

TD Bank’s voting stake will be capped at 9.9 per cent, with the balance of its position held in a new, non-voting class of Charles Schwab common stock. Additional details regarding stockholder matters, including upcoming votes, will be provided in the subsequent merger proxy materials.

Wealth player
Besides its renowned brokerage business, Charles Schwab works with RIAs and other wealth providers via its Schwab Advisory Services arm. Charles Schwab moved to a subscription-driven financial planning option for its digital advisory service. And the firm holds a major conference annually, its IMPACT event, with the most recent at the start of November.

Meanwhile, on the higher ends of the wealth spectrum, last April Family Wealth Report reported that Charles Schwab is ramping up its efforts to serve the family offices industry, a move that pits it against the likes of Fidelity Investments.

“We have long respected TD Ameritrade since our early days pioneering the discount brokerage industry, and as a fellow advocate for investors and independent investment advisors. Together, we share a passion for breaking down barriers for investors and advisors through a combination of low cost, great service and technology," Charles Schwab president and CEO Walt Bettinger said.

Among other details, this transaction included a renegotiation of the Insured Deposit Account (IDA) agreement by Schwab and TD Bank, to be effective at closing. The agreement was extended for a 10-year term beginning in 2021, and the servicing fee paid by Schwab on balances within the IDA was reduced by 10 basis points. Over time, Schwab will have the option to reduce balances routed to the IDA sweep program, subject to certain restrictions. This arrangement provides flexibility to optimize related revenue as those balances are shifted to Schwab.

The transaction is subject to customary closing conditions, including receipt of applicable regulatory approvals and approval by the stockholders of both companies. Closing is also subject to a “majority of the minority” TD Ameritrade stockholder approval condition, which means that the transaction must be approved by holders of a majority of the outstanding TD Ameritrade shares, other than TD Bank and certain other shareholders of TD Ameritrade that have entered into voting agreements.

Following the close of the transaction, TD Bank will have the right to name two new seats on the Schwab Board of Directors and TD Ameritrade will name a single director.

Credit Suisse Securities (USA) LLC served as financial advisor and Davis Polk & Wardwell LLP acted as legal advisor to The Charles Schwab Corporation. PJT Partners LP and Sandler O’Neill +
Partners LP served as financial advisors and Wachtell, Lipton, Rosen & Katz acted as legal advisor to the Strategic Development Committee of the Board of Directors of TD Ameritrade.

Integration process, new headquarters
The integration of the two firms is expected to take between 18 and 36 months, following the close of the transaction. Schwab has named Senior EVP and COO Joe Martinetto to oversee the integration initiative, assisted by a team of experts from both Schwab and TD Ameritrade.

As part of the integration process, the corporate headquarters of the combined company will eventually relocate to Schwab’s new campus in Westlake, Texas. Both companies have a sizable presence in the Dallas-Fort Worth area.

Charles Schwab was founded in San Francisco and has maintained a longstanding commitment to the Bay Area, which the firm said will continue. "A small percentage of roles may move from San Francisco to Westlake over time, either through relocation or attrition," it said.

The vast majority of San Francisco-based roles, however, are not anticipated to be impacted by this decision. Schwab expects to continue hiring in San Francisco and retain a sizable corporate footprint in the city.

In the three years to end-2018, California companies such as Toyota Motor North America, Kubota Tractor Corporation Jamba Juice, have shifted HQs to Texas, or built regional hubs, or both. The issue of firms moving some or all operations out of California, blaming regulations, taxes and other issues has become a political one.


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