What to Make of Schwab-TD Merger Talks
If a deal is announced, we anticipate multiple hurdles including a headline risk of antitrust, but we currently believe it's surmountable.
Reports are swirling that wide-moat Charles Schwab (SCHW) is talking with narrow-moat TD Ameritrade about a merger that values TD Ameritrade (AMTD) at $26 billion, or around $47.50 per share. We are currently maintaining our $44.50 fair value estimate for Charles Schwab and $52 fair value estimate for TD Ameritrade. If a deal goes through valuing TD Ameritrade at less than our long-term focused, stand-alone valuation for TD Ameritrade of $52, then we would anticipate increasing our fair value estimate for Charles Schwab, likely by more than 5%. The increase in our fair value estimate would come from Charles Schwab buying TD Ameritrade for slightly less than what we believe it’s worth and the eventual realization of revenue and expense synergies. While the deal price is potentially less than our TD Ameritrade fair value estimate, it may be reasonable because it’s an immediate payout in a rapidly changing industry.
Even if a deal is announced, we anticipate multiple hurdles that will have to be cleared. There is definitely headline risk of antitrust, but we currently believe it's surmountable. A combined Charles Schwab and TD Ameritrade would have about $5 trillion of retail brokerage and independent Registered Investment Advisor, or RIA, assets. This is significantly larger than publicly traded peer E-Trade (ETFC), that has about $500 billion of client assets. However, there are also many other firms with retail brokerage and RIA custody businesses, such as Fidelity, Vanguard, Bank or America, and Bank of New York Mellon with hundreds of billions to trillions of client assets each.
TD Ameritrade’s relationship with Toronto-Dominion Bank will take disentangling. Toronto-Dominion owns over 40% of TD Ameritrade, and will have to be brought into discussions. Not only does Toronto-Dominion have a large ownership interest, the insured deposit agreement between Toronto-Dominion Bank and TD Ameritrade, that is a material source of revenue for TD Ameritrade, will have to be negotiated.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.