TD AMERITRADE, the online broker, could sell to rival E*TRADE Financial in a stock-for-stock consideration, two sources familiar with the situation agreed.
Reported in the Financial Times, However, the talks between the two parties have not gained any momentum in recent weeks and were said to be between investment bankers and TD AMERITRADE, who were discussing the changing economic environment and the future of the broker as an independent company.
One of the sources who has been briefed on the situation but not working directly on the deal, said Goldman Sachs was consulting TD AMERITRADE on potential M&A strategy in the deteriorating trading environment.
Goldman Sachs has not been officially hired to advise on the merger with E*TRADE, the source said. Goldman did not respond to requests for comment.
The possible sale of Omaha, Nebraska-based TD AMERITRADE, which is partially owned by Toronto Dominion Bank, has been the subject of recent media reports regarding talks of a business combination with E*TRADE. Because there was no recent breakthrough in the process both sources said they were surprised to see evidence of the discussions leaked to the media. While they agreed that the two companies have been exploring this combination for sometime, an imminent deal was not being contemplated they said. One of the sources suggested negotiations were leaked as an effort to communicate with the hedge funds that have been agitating for the sale of TD AMERITRADE. JANA Partners and SAC Capital wrote to TD AMERITRADE’s board of directors on 29 May urging them to explore a merger or an acquisition.
The same source said discussions between TD AMERITRADE and E*TRADE were not occurring on a daily basis and that antitrust issues have yet to be analyzed. One of the issues under discussion has been the relationship between the brokerages and their bank counterparts. In the case of TD AMERITRADE it, is affiliated with a bank while E*TRADE owns a bank.
Toronto Dominion Bank, which owns approximately 40% of TD AMERITRADE has yet to give its blessing to an E*TRADE/TD AMERITRADE combination, the source not directly involved said.
However, the first step on the way to a potential merger has already been made with the Canadian bank and TD AMERITRADE holding a meeting to discuss the future of the online broker in the challenging trading environment.
The same source said TD AMERITRADE and E*TRADE Financial had considered combining businesses since Ameritrade was purchased by TD Waterhouse in 2006 forming the TD AMERITRADE entity. He said recent pressure from first-tier banks who are now offering similar services, and day traders waiting for market volatility and uncertainty to subside, meant a lower numbers of trades per day which translated into lower revenues for online brokers. Hence, all online brokers, including Schwab, are contemplating mergers to cut costs and increase profit margins.
He added if the economy were to go into a recession or slowed down, all three online brokers would be forced to think of how to reduce trading capacity, one of the ways of doing so was through consolidation.
To that end, in “very recent days” Schwab, another online broker, has had a “serious change in attitude” about a potential deal and decided it was “not going to sit on sidelines,” and watch a deal form between TD AMERITRADE and E*TRADE, according to the source briefed on the deal. Schwab, up to this point has not been interested in consolidation, however, bankers are said to be stepping up efforts to get mandates to do deals in the online brokerage area as profit margins continue to tighten.