Waterhouse, E*Trade deal near
By JACQUIE McNISH AND SINCLAIR STEWART
From Tuesday's Globe and Mail
Toronto-Dominion Bank is in final discussions to merge its TD Waterhouse unit with E*Trade Financial Corp., a move that would create a discount brokerage powerhouse just as the beleaguered sector is making a recovery.
According to sources familiar with the negotiations, TD Bank would be the biggest shareholder in the merged company, with a stake of between 40 and 50 per cent. E*Trade is the largest of the two brokerage companies with a market capitalization of about $5-billion (U.S.), but its shares are widely held by U.S. pension and mutual funds. Assuming TD Bank secures a 40-per-cent interest in the combined company, the planned transaction would have an implied value of about $8-billion.
Negotiations between TD and E*Trade have reached the final stages, sources said, and a proposed deal could be presented to the boards of both companies as early as next week.
Dianne Salt, a spokeswoman for TD, declined to comment. A spokeswoman for E*Trade declined to comment.
As talks currently stand, sources said TD Bank has agreed to let E*Trade's management run the merged company and its headquarters will be in New York, where E*Trade moved this month from its former base in Menlo Park, Calif. It is understood that TD Bank is seeking to obtain certain rights to increase its stake in the merged company over time.
TD Bank had been reviewing the future of its discount brokerage operations since December, 2002, when Ed Clark was named chief executive officer. At the time, the discount brokerage sector was under siege because of the sharp decline in electronic stock trading following the crash in Internet stocks. Although many observers believed Mr. Clark would sell TD Waterhouse, sources said the executive has been telling the bank's board of directors for months that the brokerage unit was a crucial building block for a U.S. expansion.
"Ed sees this merger as a platform to make a big move into the U.S. and give the bank a tier one position," said one person familiar with the discussions.
The planned merger would enable Mr. Clark to unlock the so-called hidden value of the bank's TD Waterhouse unit and at the same time greatly increase its presence in the intensely competitive U.S. market.
The bank has been in discussions with E*Trade and its competitors Ameritrade Holding Corp. and Charles Schwab Corp. for months, but sources said talks with the other players broke down over strategy and price. By December, sources said Charles Schwab was rejected because it was only interested in a takeover of TD Waterhouse. Talks with Ameritrade failed to advance because the Omaha-based company had, in the words of one source, "a very rich valuation" of its stock that TD Bank did not share.
Schwab is currently the largest discount broker in the United States with $938-billion in customer assets, thanks largely to its focus on high-net-worth customers. A combined TD Waterhouse-E*Trade would place a distant second, with $236-billion in customer assets. The merged company would also rank first or second among discount brokers in a handful of other major categories. It would surpass Ameritrade for the most average trades a day, with a combined 266,000 logged in November.
It would rank second to Schwab in terms of total customer accounts, with almost five million.
If it nails down the E*Trade merger, TD will be able to expand its foothold in the rapidly consolidating discount brokerage industry. TD Waterhouse, like its competitors, is beginning to benefit from increased trading activity after more than two years of being battered by a bear market.
One of the main advantages of the potential merger is cost savings, which could be achieved by eliminating overlapping technology systems.
Ian de Verteuil, an analyst with BMO Nesbitt Burns Inc., estimated in a research report last November that a combination of E*Trade with TD Waterhouse's U.S. business could trim the unit's expenses by 40 per cent.
Ameritrade slashed costs by as much as 75 per cent at Datek Online Holdings Corp. after it bought the discount broker in 2002.
A merger with E*Trade would also provide a powerful boost to TD's capital position, making it cheaper for the bank to raise cash for other acquisitions.
If the merger is successful, TD Bank would likely report a significant one-time gain on the value of its discount brokerage. TD Bank's stake in the merged company would be roughly 40 per cent or about $3-billion if the merger is completed. For accounting purposes, however, the carrying value of TD Waterhouse's U.S. operations is much lower, at an estimated $800-million, according to Mr. de Verteuil. Therefore, the difference between the two figures and the potential size of the one-time gain could be $2.2-billion.
The analyst described E*Trade as a "solid" partner for TD, but highlighted a few possible complications in the pairing.
E*Trade has branched into on-line banking in recent years, offering products such as loans and mortgages in addition to its core discount brokerage services. That could hinder any plans TD may have to build a physical retail branch network in the United States because of possible conflicts of interest, Mr. de Verteuil noted.
All of his estimates were based on a merger involving only TD Waterhouse's U.S. business, and not its dominant position in Canada. It is unclear whether E*Trade's Canadian operations will be absorbed by TD. |
