Ameritrade to Acquire TD Waterhouse

Will create bigger force in online brokerage and advisor custody businesses

Ameritrade Holding Corp., the Omaha-based discount broker, and TD Bank Financial Group, the Toronto-based parent of Toronto-Dominion bank, announced June 22 that Ameritrade will acquire TD's U.S. brokerage and custody business, TD Waterhouse U.S.A.. The combined company will be called TD Ameritrade (TDA) and will be led by Joe Moglia, current Ameritrade CEO. Under the agreement, TD Bank Financial will receive about 32% ownership in TD Ameritrade; Ameritrade shareholders will receive a special cash dividend of $6 per share, subject to closing (expected within six months, the companies said); and TD Bank Financial will acquire Ameritrade's Canadian brokerage operations for $60 million (U.S.) in cash.

The companies said that "had the two companies operated as a single entity

for the twelve months ended March 2005 with the full benefit of the expected synergies" from the merger, average daily client trades would be 239,000; pre-tax margins would be 52%; annual net income would be $557 million on revenue of $1.8 billion; and the company would custody more than $42 billion in RIA assets through 4,000 registered investment advisor relationships.

In a conference call with analysts and journalists, Moglia said that with the acquisition, "We are significantly extending our RIA relationships and we now have a full-scale branch network," and that the deal "puts us into the asset-gathering business."

Commenting on TD's motivations for the deal, Ed Clark, CEO of TD Bank Financial, said, "We wanted a combined entity that would focus on wealth management," and noted that while Ameritrade "owns the active trader space," it needed to attract longer-term investors via the TD Waterhouse branches and RIAs. However, Clark noted that "the market will determine whether this is a done deal...in the event that a superior offer comes forward." E-Trade Financial, for one, recently offered $2 billion for 49.5% of Ameritrade.

In response to a question about who would be running the advisor business at TDA, Moglia said, "We haven't made a decision yet with regard to personnel," but he added that "TD Waterhouse is so strong in this area."

Asked whether most of the savings would come from the TD side, Moglia said, "No--you can't assume that. We want to do the right thing," but he also tersely answered "yes" when asked whether there would be branch closings. As for future mergers, Moglia warned, "Don't assume that consolidation of the industry is over, or that it is over for Ameritrade."

Jonathan Krasney, of Krasney Financial in Brookside, New Jersey, a longtime TD Waterhouse advisor client and member of the firm's advisory board, said that to him, "it seems fairly clear that the retail and long-term investors will operate eventually on the Ameritrade platform, while RIAs will grow on the Waterhouse platform." The big question for Krasney, however, is "who stays and who goes." He expects "Bradley [Tom Bradley, head of TDW's advisor business] stays on the advisor side, but who id under him is an open issue."

Showing how the proposed TD Ameritrade will shape up next to its nearest rivals, Ameritrade estimated that the new firm's 239,000 average daily client trades will compare to 191,000 at Charles Schwab and 88,000 at E-Trade. TD Ameritrade's estimated pretax profit margin will be 52%, versus 33% at Ameritrade and 16% at Schwab, Ameritrade said.

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