In this July 18, 2010, file photo, a TD Ameritrade logo is displayed on the office in Omaha, Neb.Nati Harnik/The Associated Press
Outside work, TD Ameritrade Holding Corp. CEO Tim Hockey is known as a formidable long-distance cyclist.
The same qualities that allow the discount brokerage boss to set a blistering pace on 100-kilometre-plus rides – perseverance, commitment, focus – should give investors comfort as TD Ameritrade and its biggest shareholder, Toronto-Dominion Bank, roll out a $4-billion (U.S.) takeover bid of U.S. discount broker and retail banker Scottrade Financial Services Inc.
Mr. Hockey and TD Bank CEO Bharat Masrani have spent their entire careers preparing for this sort of deal. If a multibillion-dollar, cross-border acquisition can ever be described as low-risk, this is it. Snapping up Scottrade speaks to the unique platform that TD Bank has built in the U.S. market, and the growth potential of the franchise.
Investors can be forgiven for cringing when Canadian companies announce multibillion-dollar U.S. acquisitions. Our corporate history is littered with cross-border deals that destroyed shareholder value. This is especially true in banking – we're looking at you, CIBC and Royal Bank. The common theme in failed forays is a Canadian buyer that entered a highly competitive market where it had little experience, then faced cultural and integration issues.
TD Ameritrade and TD Bank got those growing pains out of the way years ago.
In a briefing on the Scottrade transaction early Monday, Mr. Hockey put up a slide showing that this is the 11th major acquisition undertaken by TD Ameritrade – a series of training runs that build up to a monster bike ride. Mr. Hockey, former head of TD Bank's Canadian retail operations, said: "Integration, while large, will not be as technically complex as others we have done."
The same integration skills exist at TD Bank, which is spending $1.3-billion to acquire Scottrade's banking business as the first stage of the takeover that will then see TD Ameritrade spend $2.7-billion to buy the brokerage business.
Mr. Masrani ran a U.S. retail banking division that melded together a string of rivals before moving back to Toronto to take the top job in 2014.
Along with acquiring Scottrade's banking business, TD Bank will buy an additional $400-million of stock in TD Ameritrade to help fund this transaction. The show of faith is easy to justify: The Omaha-based discount broker has turned in an impressive performance for TD Bank, which owns 42 per cent of the company, and its other shareholders. Bloomberg data show TD Ameritrade stock averaged a 17.6-per-cent annual return over the past 20 years, while comparable companies in the benchmark Russell 1000 Financial Services Index turned in just a 2.1-per-cent average annual return over the same period.
Enormous savings will flow from combining Scottrade's operations with those of TD Ameritrade. Mr. Hockey estimated that, while there are $550-million in restructuring charges coming, TD Ameritrade can cut annual costs by $450-million and realize another $300-million in long-term opportunities. But this acquisition is about far more than cost-cutting.
Discount brokers win clients by offering the lowest-cost trades. They make money by backing up low-margin trading with highly profitable financial products and services. More clients means cheaper trades, as most of this traffic moves through computers, where costs are fixed. More clients also mean more opportunities to sell extra services.
For example, anyone opening a trading account at Scottrade with more than $500 automatically also gets a chequing account. Scottrade clients are also pitched everything from mortgages to fee-generating advice on investing, retirement and estate planning. By all accounts, Scottrade has the best client service culture in the business.
The challenge to TD Bank and TD Ameritrade is seamlessly melding their services with Scottrade. Get it right, and the combined company will be a U.S. leader on par with Charles Schwab and Fidelity Investments, with 10 million client accounts and $944-billion in assets. Mr. Hockey summed up the rationale of the Scottrade acquisition on a conference call by saying that it will help TD Ameritrade "compete and win on the client experience … eliminating friction at all client touch points."
TD Bank and TD Ameritrade estimate it will take until 2018 to close this transaction and fully integrate operations – again, a long, grinding ride, but one that Mr. Hockey's team and TD Bank are more than ready to undertake. There is nothing particularly new or frightening in what lies ahead. In acquiring Scottrade, TD Bank stands to reap the benefits of investments made over the past two decades in the U.S. market.