Ameritrade / TD Waterhouse

Online discount brokers Ameritrade Holdings Corp. and TD Waterhouse USA are discussing a possible merger, the companies said on Tuesday.

Analysts said a deal could be worth up to $3 billion and would likely be structured so Ameritrade owned the lion's share of the combined company.

In a brief statement, Ameritrade and TD Waterhouse USA's parent company, Toronto-Dominion Bank, said there were no assurances a deal would be consummated, or what the terms of a transaction might be.

Shares of Ameritrade were up 3 percent, giving the company a market valuation of about $5.9 billion.

Analysts see some sort of combination between brokers as inevitable, as the sector's players look for added heft to cut costs to offset slipping trading volumes.

Earlier this month, Ameritrade, based in Omaha, Nebraska, rebuffed an approach from rival E*Trade Financial Corp., which offered Ameritrade shareholders 47.5 percent of the combined company plus $1.5 billion in cash.

David Trone, an analyst at Fox-Pitt, Kelton, said in a research note that Ameritrade shareholders "should benefit nicely from any consolidation event involving the company."

A key question is whether Ameritrade uses the acquisition of TD Waterhouse USA as a "strategic expansion into the 'investor' space." At present, Ameritrade's customers are primarily traders.

A potential deal could see Ameritrade pay about $3 billion, with its shareholders ending up with about two-thirds of the new company, Trone wrote.

Harrell Smith, manager of the securities and investments practice at Celent, a research and advisory firm focused on financial services, thought a deal could be valued at $2 billion to $3 billion and could be structured as a merger, "with Ameritrade potentially having the upper hand."

Smith said the Ameritrade name was the most likely to survive.

Fox-Pitt's Trone said E*Trade could come in with its own offer for TD Waterhouse USA or could boost its bid for Ameritrade.

"The latter would likely prove futile, should Ameritrade indeed cut a deal with TD, because the Ameritrade board members would have even more 'business judgment' leeway than before to shun E*Trade," Trone wrote.

Ameritrade shares were up 45 cents to $14.84 in afternoon trade on the Nasdaq stock market.

Toronto-Dominion was up C$1.23 to C$53.43 on the Toronto exchange.

E*Trade rose 14 cents, or 1 percent, to $12.24 on the New York Stock Exchange.



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