Ameritrade / TD Waterhouse

Rejecting a takeover offer from E-Trade Financial Corp., Ameritrade Holding Corp. says it will instead acquire rival online brokerage TD Waterhouse from Toronto-Dominion Bank.

Online brokerages -- which at the height of the stock market boom saw valuations soar above brick-and-mortar firms such as Merrill Lynch & Co. and Morgan Stanley -- have recently been hurt by price cuts, lower commissions and a drop-off in equity investing.

The companies valued the all-stock deal at about $2.9 billion.

Ameritrade Chief Executive Joe Moglia will become CEO of the new TD Ameritrade, which the Omaha, Neb.-based company said would become the largest online broker at 239,000 average daily client trades. The combined company would have annual revenue of more than $1.8 billion and about 5.9 million total accounts.

"Where we are strong, we are now going to be stronger," Moglia said in a conference call Wednesday shortly after the announcement.

Ameritrade will pay its shareholders a special dividend of $6 per share, or about $2.4 billion. TD Bank Financial will receive about 32 percent ownership in the new TD Ameritrade and the new company will be governed by a dozen board members from both original institutions, with Moglia at the helm and TD Waterhouse's CEO Ed Clark as vice chairman.

As part of the deal, which is expected to close in about six months, TD Bank Financial Group will acquire Ameritrade's Canadian brokerage operations for $60 million.

Late last month, Ameritrade and Toronto-Dominion Bank confirmed they were discussing a possible merger. That came even as word persisted that E-Trade wanted to buy Ameritrade in a deal reported to be worth at least $6 billion.

Ameritrade answered those unsolicited bids with confirmation that the company was not for sale. But founder and chairman Joe Rickets and Moglia both hinted that the company would continue to examine consolidation options. Moglia again reiterated the possibility Wednesday, saying the new merger doesn't mean others aren't possible.

"Don't assume, however, that consolidation for the industry is over, and don't assume that it's over for Ameritrade," Moglia said.

After the deal closes, TD Bank Financial Group will offer to buy an additional 7.9 percent of outstanding shares at $16 per share. The agreement allows TD Bank Financial Group to have a maximum ownership of 39.9 percent for the first three years and a maximum 45 percent up to 10 years.

"We want to move right away to 39.9 percent," Clark said.

Ricketts agreed to limit his family's ownership to 29 percent of the combined company for 10 years.

Consolidation has been one of the keys to Ameritrade's success, as it has acquired or merged with seven companies within the last four years, Moglia said. Its most notable merger was in 2002 with rival Datek Online Holding Corp., a move which boosted its accounts by 800,000 and generated more than $11 billion in client assets.

With trade volume decreasing and online brokerages dropping prices to compete for business, such consolidations make sense, said Bill Doyle, an analyst with Forrester Research in Cambridge, Mass.

"Ameritrade has created a highly efficient operation both on the back and the front end of the business and that's the kind of scale of efficiency that is needed now at a time when the business is tough," Doyle said.

With the merger, Ameritrade will be able to tap into one of the fastest growing sectors in the investment market -- personal advisers, Doyle said. Waterhouse's 140 nationwide branches will appeal to traders wanting personal attention, especially baby boomers who may not have enough money to attract a full-fledged broker, he said. Moglia also said the branches will add another dimension to the business, although he said some branch closings are being considered.

"The whole advisory dimension is something that Ameritrade hasn't had and they'd be smart to take advantage of that dimension that TD Waterhouse would bring," Doyle said.

New York-based TD Waterhouse is considered to be one of the world's largest online brokerages. It serves more than three million customers in the United States, Canada and Britain.

Ameritrade, based in Omaha, Neb., had about 3.7 million accounts as of last month. It averaged 133,000 client trades per day in May, down 5 percent from 140,000 trades in April and 8 percent from May 2004's volume of 144,000 trades a day.

Ameritrade shares rose $3.05, or 20.6 percent, to close at $17.87 Wednesday on the Nasdaq Stock Market. Toronto Dominion's U.S.-traded shares rose 54 cents to $44.15 on the New York Stock Exchange. Both stocks set new 52-week highs on Wednesday.

(c) (AP)


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