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TD Ameritrade Buyout of E*TRADE – 8 Pros and Cons

Written by Blain on July 29, 2011.

Rumors are floating around that E*TRADE (ETFC) is up on the deals block and open for sale. E*TRADE’s largest shareholder, Citadel, which owns just under 10% of the total outstanding shares, has ramped up its pressure on E*TRADE to make something happen and as a result the broker has hired Morgan Stanley to propose options. The most obvious suitor? TD Ameritrade (AMTD).

With Charles Schwab (SCHW) acquiring OptionsXpress earlier this year, they are out of the picture. And with E*TRADE’s strapped financial situation due to its flailing mortgages portfolio, the only other legitimate suitor appears to be TD Ameritrade.

In our eyes, there are several major advantages and disadvantages to this deal that TD Ameritrade will most definitely be mulling over.

Advantages

  • - Both brokers are already very aligned as far as commission rates are concerned. Comparing the two brokers directly, we can see that standard stock and options trades are the same at $9.99 + $.75 per contract. This means less confusion for new clients coming over.
  • - TD Ameritrade can offer E*TRADE clients a slew of tools and research, both free and premium. Commission free ETFs will be loved by all E*TRADE clients and Premium services such as investools can serve as easy ways to generate more per client.
  • - TD Ameritrade can offer E*TRADE clients forex trading via thinkorswim.
  • - TD Ameritrade can utilize the infamous Baby commercials to their benefit. Targeting a younger, hipper crowd is arguably not one of TD Ameritrade’s strengths, so this could certainly help.
  • - Access to fresh talent and one less competitor. In the end, TD Ameritrade gets new clients, a lot of fantastic talent, and will have one less direct competitor to contend with for new business.

Disadvantages

  • - TD Ameritrade is still wrapping up its engulfment of thinkorswim. Perhaps the timing isn’t right to start a fresh merger.
  • - There is a big reason why E*TRADE’s stock has slumped from over $230 a share (post reverse split pricing) to under $16 a share. Its involvement in the mortgage business caused financial ruin for the company and it still has not recovered. With $10.5 Billion in debt, E*TRADE’s shaky financials will surely be a headache for TD to deal with.
  • - What to do with E*TRADE’s current platforms and tools? TD Ameritrade has already begun using thinkorswim as its flagship active trader platform and just recently launched Trade Architect for more casual investors. Is there any room left for Power E*TRADE and Power E*TRADE Pro?

By the looks of the stocks, investors are definitely jumping onboard the speculation train, but cautiously. E*TRADE stock moved from $13 to as high as $16.66 in less than a week, but now is trading near $15.50.

If a deal actually did take place, it would be hard to imagine TD Ameritrade only having to pay a $4.4 billion total for E*TRADE, which is what the total market cap is at roughly a $15.50 price point.

Price speculations aside, a marriage between TD Ameritrade and E*TRADE is a risky proposition. However, while it would take several years to properly integrate E*TRADE into the TD Ameritrade ecosystem, once the dust finally settled the end result could be a masterpiece. After all, who wouldn’t want to see the first commercial with the E*TRADE baby meeting the TD Ameritrade icon (previously the TD Waterhouse guy)?

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