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Ameritrade Will Buy Rival Online Broker TD Waterhouse (Update5)

Ameritrade Will Buy Rival Online Broker TD Waterhouse

June 22 (Bloomberg) -- Ameritrade Holding Corp. agreed to buy TD Waterhouse USA in a transaction that values the Toronto- Dominion Bank unit at about $2.25 billion to become the biggest online broker by trades.

Toronto-Dominion will receive a 32 percent stake in the combined company. Ameritrade will pay its own holders a $2.41 billion special dividend, or $6 a share, funded in part by Toronto-Dominion, the companies said in a statement today.

Ameritrade, based in Omaha, Nebraska, made the purchase six weeks after spurning a takeover offer from E*Trade Financial Corp. The acquisition will be at least the seventh by Chief Executive Officer Joseph H. Moglia, 56, since he took over in 2001. Rivals including Charles Schwab Corp. and Fidelity Investments have cut fees this year to gain market share in response to a slowdown in trading over the Internet.

``Ameritrade needed to add more trades to its pipeline,'' said Matthew Fischer, an analyst at IRG Research Group LLC in New York. ``This helps them gain some scale. It had been losing customers prior to the deal and their trade volumes had been deteriorating.''

Ameritrade had 402.4 million shares outstanding at the end of April, indicating the Canadian company will receive 189.4 million shares. Based on the current share price, which reflects the $6 dividend, that stake would be worth $3.38 billion. Toronto-Dominion won't get the dividend.

``There is excess capacity in online brokerage right now, and there will be after this deal,'' Moglia said in an interview. ``The retail investor right now is more on the nervous side than not.''

Moglia will lead the new company, to be called TD Ameritrade.

Shares Surge

Shares of Ameritrade rose $3.05, or 21 percent, to $17.87 in composite trading on the New York Stock Exchange. Toronto- Dominion gained 81 cents on the Toronto Stock Exchange to C$54.57.

The purchase will add to earnings within 12 months, the companies said. TD Bank Financial Group will also acquire Ameritrade's Canadian brokerage operations for $60 million.

Assuming the two companies operated as a single entity for the twelve months ended March 2005, they would have had annual revenue of more than $1.8 billion and annual net income of $557 million, according to their joint statement.

On that basis, the companies would have had more than 3 million customers and client assets of about $219 billion.

``TD Ameritrade can now provide whatever the individual investor needs,'' Moglia said during a conference call with investors. ``Where we're strong, we're now going to be stronger.''

`Lackluster' Market

Toronto-Dominion Chief Executive Officer Edmund Clark, 57, is focusing on consumer banking after purchasing a 51 percent stake in Portland, Maine-based Banknorth Group Inc. in March for about $3.5 billion. It was Toronto-Dominion's first foray into consumer banking in the U.S.

Ameritrade last month cut its earnings forecast for fiscal 2005 as trading fell 14 percent. ``We're seeing lackluster market performance and feel retail investors are waiting for economic conditions to improve,'' Moglia said in announcing the reduced estimate on May 13.

E*Trade made an unsuccessful bid for TD Waterhouse's U.S. business more than a year ago and then tried to buy Ameritrade. Ameritrade Chairman J. Joe Ricketts last month said the company wasn't for sale.

E*Trade `Disappointed'

``We are disappointed with the outcome,'' said E*Trade spokeswoman Pam Erickson. ``We still believe consolidation is important and we fully intend to be an active participant in future consolidation.''

TD Waterhouse's 106,000 daily average trades in the three- month period ended April 30 would help Ameritrade surpass the 191,000 Schwab recorded in its first quarter, which ended March 31. Ameritrade customers made 167,200 trades a day on average in its most recent quarter, ended March 25. On a monthly basis, Ameritrade reached an all-time high of 254,000 average daily trades in January 2004.

``We don't think this combination significantly changes the landscape for Schwab,'' said Schwab spokeswoman Sarah Bulgatz. ``We have broader and more sophisticated investment advice capabilities.''

Volume Decline

TD Waterhouse said last week that trading volume declined as clients opened fewer new accounts. Total trades in May were 88,900, down 5 percent from April's average.

Ameritrade's total customer accounts would rise to almost 6 million from its current 3.7 million after combining with TD Waterhouse, according to Michael T. Vinciquerra, an analyst at Raymond James Financial Inc. in Atlanta.

Credit Suisse First Boston analyst Howard Chen said in a May 31 research note to clients that the combined company would control as much as 35 percent of the U.S. market for individual investors, based on daily average trades.

Ameritrade, E*Trade and Schwab were hurt by the 73 percent slump in the Nasdaq Composite Index that stretched from September 2000 to October 2002. Ameritrade posted annual losses for three straight years until 2003 and earned $272 million last year. It said in April that fiscal second-quarter net income fell 12 percent to $71 million, or 17 cents a share.

TD's Focus

Ameritrade's average daily trades during the second quarter were down 21 percent from a year earlier and 2.4 percent below the previous three months.

``Just about any consolidation in this space makes sense because there's so much excess capacity out there,'' Vinciquerra at Raymond James said.

TD Waterhouse's U.S. unit is run by Tim Pinnington, who was 40 when he was named to the post last September.

Toronto Dominion is ``going to concentrate their time and capital on a more traditional retail banking strategy,'' said Ian Nakamoto, director of equity research at MacDougall, MacDougall & Mactier Inc. in Toronto, which has about $2.5 billion under management.

To contact the reporter on this story:
Gregory Cresci in New York at [e-mail];
Will Edwards in Atlanta at [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000103&sid=aAyRhok.JfQA&refer=us