Schwab, TD Merger Should Be Positive for Valuations
We believe that Schwab's already strong business model will be enhanced by the merger with TD Ameritrade, and we expect to assign a wide moat to the combined entity.
The announced merger between wide-moat Charles Schwab (SCHW) and narrow-moat TD Ameritrade (AMTD) should be positive, in our view, for the valuations of all of the online brokerages. The transaction is expected to close in the second half of 2020, following shareholder and regulatory approval, and is structured as an all-stock deal with TD Ameritrade shareholders receiving 1.0837 shares of Schwab for each share held. We believe that Schwab's already strong business model will be enhanced by the merger with TD Ameritrade, and we expect to assign a wide moat to the combined entity. Based on our preliminary calculations, we expect our valuation for Schwab to increase 10%-15% to around $50 per share, with our fair value estimate for TD Ameritrade increasing to around $55 per share. That said, we are maintaining our $46.50 fair value estimate for narrow-moat E-Trade.
Schwab and TD Ameritrade estimate that the deal will generate $3.5 billion-$4.0 billion of synergies, but that it might take a while to realize. The integration process is expected to take 18-36 months, which could delay some of the $1.8 billion-$2.0 billion of expense synergies, but should be a positive from the perspective that it is likely to reduce the potential disruption to retail and advisor customers. Most of the revenue synergies will come from eventually moving deposits into Schwab’s bank from Toronto-Dominion, so revenue synergies will likely take a while to fully realize, as the deal includes a renegotiation of the insured deposit account agreement between TD Ameritrade and Toronto-Dominion Bank, which has been extended to 2031.
On a separate note, we still think E-Trade is an investment worth looking at, as there is going to be some customer attrition during the merger, with E-Trade likely being a prime beneficiary. While E-Trade is no longer a candidate for a merger with Schwab or TD Ameritrade, there are other firms, banks, and wealth managers that we think E-Trade might fit in with longer term.
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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.