The combined entity will oversee more than $5 trillion in client assets in 24 million brokerage accounts, the companies said in a press release issued Monday morning, after rumors emerged of a possible deal last week.
TD Ameritrade stockholders will receive Schwab shares in exchange for their TD Ameritrade shares representing a 17% premium over the 30-day volume weighted average price exchange ratio as of November 20, 2019, according to the announcement.
The deal, pending regulatory and shareholder approvals and customary closing conditions, is expected to close in the second half of 2020, the companies say.
TD Ameritrade’s board of directors has also suspended its previously announced CEO search and named Stephen Boyle, TD Ameritrade executive vice president and CFO, as the company’s interim president and CEO.
After the close of the deal, the companies expect to spend about 18 to 36 months on integration, which will be overseen by Schwab’s newly named executive vice president and chief operations officer Joe Martinetto, who will be assisted by experts from both companies. After the close of the deal, TD Bank will have the right to name two new seats on Schwab’s board of directors and TD Ameritrade will name a single director, the companies say.
Part of the integration process includes putting the headquarters of the new entity in Schwab’s new campus in Westlake, Texas, according to the press release. Schwab, which was founded in San Francisco, says it plans to maintain its “longstanding commitment to the Bay Area” and adds that the “vast majority” of company roles in San Francisco will not be impacted by the merger.
Founded in 1975 and headquartered in Omaha, Neb., TD Ameritrade serves around 12 million accounts with approximately $1.3 trillion in assets and provides custodial services to more than 7,000 RIAs, according to the press release.
Schwab, which was founded in 1971, had 12.1 million active brokerage accounts, 1.7 million corporate retirement plan participants, 1.4 million banking accounts and $3.77 trillion in client assets as of the end of September.
Scroll down to see breakdown and size of the custody marketplace
The deal is aimed at building “a firm with the soul of a challenger and the resources of a large financial services institution that will be uniquely positioned to serve the investment, trading and wealth management needs of investors across every phase of their financial journeys,” Schwab president and CEO Walt Bettinger says in the announcement.
Reports of the deal first surfaced in the media last week, drawing concerns from financial advisors, as reported.
Creating a Goliath
Early feedback from the industry has focused on the scale of the deal and its impact on broker-dealer and RIA firms.
Michael Papedis, managing partner of Fusion Financial Partners, says the new merged company “would represent nearly half of RIA custody assets and serve around 9,000 advisors — an industry Goliath."
However, Papedis raises the prospect that the deal could get “hung up” with antitrust questions. Fusion is an independent consulting firm to breakaway advisors and RIAs.
Meanwhile, Runik Mehrotra, the co-founder and chief technology officer Vise AI, tweeted shortly after the rumored deal was reported by media last week: “I think this is good for the brokerage industry and bad for the RIA space. Competition among brokerages is essential for a better RIA offering. And since TD and Schwab own so much of the market of RIAs under [$]500 million [in AUM], this could hurt longer term."
Vise AI is a venture-backed startup using artificial intelligence for portfolio construction and management for RIAs and family offices. Mehrotra says Visa AI is a customer of both Charles Schwab and TD Ameritrade.
Ross Gerber, CEO of $950-million AUM Gerber Kawasaki Wealth and Investment Management, expects to “see more consolidation and more pressure to cut fees because this monster firm will be the one to watch in the industry.”
Cerulli, meanwhile, has warned that the deal — which combines the largest and the third-largest player in the custodial space that together account for more than 51% of custodied assets — will drastically alter the space. Meanwhile, RIAs may have to accept that Schwab will likely reduce investment in technology, according to research firm Celent.
Schwab released this FAQ about the deal:
Q: What was announced today?
A: The Charles Schwab Corporation and the TD Ameritrade Holding Corporation have entered into a definitive agreement for Schwab to acquire TD Ameritrade in a stock transaction valued at approximately $26 billion, which represents a 17% premium over the 30-day volume weighted average price exchange ratio as of November 20, 2019.
Q: How does this fit into our strategy?
A: This transaction is squarely in line with Schwab’s long-term strategy. It allows Schwab to continue to add scale on top of its organic growth, with the addition of approximately 12 million client accounts, $1.3 trillion in client assets and $5 billion in annual revenue. We expect this added scale to lead to lower operating expenses as a percentage of client assets (EOCA), which helps fund enhanced client experience capabilities, improve the company’s competitive position and further its financial success. This is our Virtuous Cycle at work.
Q: What does this mean for clients?
A: There is no immediate impact for clients of either firm. Until the transaction is complete, the two firms remain separate entities, and we will continue to operate our businesses as usual. Once the sale closes in 2020, we will begin combining the firms, focusing on decisions that will lead to enhancements for clients by identifying the best capabilities from both firms.
This transaction will allow Schwab to expand its “no trade-offs” approach to value by combining the best of the two firms’ innovative and client-centric products and services. These include leading trading and wealth management platforms, custody platforms and tools, investor education, award-winning service, retirement services, banking, asset management, and a unique satisfaction guarantee. This puts Schwab in a strong position to compete for new clients and deepen relationships with existing clients.
Q: What happens next?
A: We expect the transaction to close in the second half of 2020 with integration efforts to begin immediately thereafter.
Q: Who will lead the integration efforts?
A: Joe Martinetto, Chief Operating Officer of Charles Schwab, will oversee the integration initiative assisted by a team of experts from Schwab and TD Ameritrade. The integration is expected to take between 18 and 36 months.
Q: Will jobs be eliminated as part of the integration?
A: Yes. Reductions in staff are a necessary part of achieving overall expense synergies.
The majority of positions that will be eliminated will be determined based on overlapping and duplicative roles. Details on how these decisions will be reached will be shared at a later date, once the integration process has begun.
Q: Where will the combined company be headquartered?
A: As part of the integration process, the corporate headquarters of the combined companies will eventually relocate to Schwab’s new campus in Westlake, Texas. Both companies have a sizable presence in the Dallas-Fort Worth area. This will allow the firm to take advantage of the central location of Schwab’s new campus as the hub of a network of Schwab branches and operations centers that span the entire U.S., and beyond.
Q: What does the headquarters move mean for the future of Schwab’s presence in San Francisco?
A: Schwab was founded in San Francisco and has maintained a longstanding commitment to the Bay Area, which will continue. A small percentage of roles may move to Westlake over time, either through relocation or attrition. 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. Any additional real estate decisions will be made as part of the integration process, over time.
Q: Does this affect the USAA acquisition?
A: This transaction should have no effect on the USAA transaction as the integration of the USAA brokerage and wealth management business should be completed before the integration of TD Ameritrade begins.