E*Trade, Ameritrade Talking Merger Again

Rumors are flying that E*Trade and TD Ameritrade are again discussing a possible merger, a long-contemplated move that would create an online stock trading powerhouse.

The companies have been in talks for several weeks, but it’s not likely that a deal is imminent, according to the Wall Street Journal. Current discussions are focusing on creating a unified strategy the two parties can agree upon, the newspaper said.

In fact, the two Web-based brokerages have discussed merging in the past, only to have talks break down, reportedly grinding to a halt each time over the same sticking points, including which company’s executive team would run the merged entity.

However, Ameritrade in particular may have additional motivation to get a deal done, as it is facing pressure from investors to find a merger partner to help unlock shareholder value. In June, two major hedge funds — SAC Capital and Jana Partners — wrote to TD Ameritrade management outlining the case for a merger with either E*Trade or Charles Schwab.

Investors were buoyed by word that talks were at least under way again, with E*Trade shares rising about 1 percent to US$15.70 and Ameritrade stock up nearly 4 percent to $16.95 in late morning trading Wednesday.

Sticking Points

The Web brokerage industry has been dramatically reshaped in the past half-dozen years, first by the dot-com shakeout that claimed some upstart firms and then by a wave of consolidation that struck in 2004 and 2005. When the dust settled, Schwab was the market leader and firms such as E*Trade and Ameritrade found themselves forced to cut prices on stock trades to remain competitive.

Neither company would confirm a deal was being discussed, but E*Trade did say in a statement that it believes further consolidation could have “tremendous value” if the deal “aligns business strategy and operational synergies.” Ameritrade said only that it has and will continue to talk to potential partners.

If merged, the two brokerages would have more stock-trading accounts than current market leader Schwab, with E*Trade bringing 4.7 million accounts and Ameritrade 6.3 million. Schwab is believed to have about 6.9 million brokerage accounts on the books, UBS analyst Michael Carrier told the E-Commerce Times.

Market Conditions

The odds of consolidation taking place in the near term remain “relatively low,” he said, and the current credit concerns that have roiled stock markets in recent weeks may play into the deal, with E*Trade forced last week to detail its mortgage market exposure amid rumors suggesting that part of its business was in dire straits.

The stock market’s dip could provide an impetus for the merger talks as well, however, as more investors may sit on the sidelines to watch which direction the market moves in, which could lower stock trading revenue, according to Carrier.

Meanwhile, the hedge funds pushing for a merger to take place have indicated they are willing to play hardball with TD Ameritrade, filing a request for access to the company’s financial documents. The investors say by combining, the companies could save as much as $600 million a year, money that could boost the bottom line and help add shareholder value, but argue that Toronto-Dominion Bank, which is the brokerage’s biggest shareholder, may be preventing a deal from being consummated.

Hurdles Await

Any merger would likely be subject to a rigorous vetting by antitrust regulators, with the impact on consumers a major question. Competition among the brokers has helped keep prices for stock trades relatively low, Forrester Research analyst Bill Doyle told the E-Commerce Times.

Consumer advocates might argue that with fewer competitors, a merged brokerage may have less incentive to keep costs low, but Doyle said the dynamics of the Internet stock trading landscape are already changing, with two banks debuting free trading offers earlier this year.

While those free offers aren’t expected to shift market share significantly, they may be a sign of a looming price war, one that could alter consumer expectations. “Consumers may start to think that any trade could be free,” Doyle said. “Other companies are going to have to prepare to face that reality.”

By combining, the brokerages could also better withstand the inevitable slowdowns in the trading business, which has ridden the bull market in place for much of this year before the sell-off of the past month, and will see strong organic growth regardless of what the markets do over the next several years, Doyle added. Forrester estimates that by 2011, 48 percent more U.S. households will trade stocks online than do so today.