Wall Street Analysts Love Schwab's Pursuit Of TD Ameritrade

TD Ameritrade Holding Corp. AMTD shares jumped 24% on Thursday and Charles Schwab Corporation SCHW shares gained 11% on reports that a merger between the two online brokers could be imminent.

Fox Business reported Schwab wants to buy TD Ameritrade for $26 billion. A combination of the two brokers would create a company with more than $5 trillion in combined assets.

Analysts and investors have emphasized the need for brokers to scale up their businesses after a pricing war resulted in most major online brokers eliminating standard stocks and ETF trading commissions earlier this year.

Several analysts have weighed in on the deal.

Voices From The Street Talk Schwab + TD Ameritrade

JMP Securities analyst Devin Ryan told CNBC the commission cuts are likely the driving force behind the deal.

“If you’re Schwab and you that commissions are going to zero, you don’t want to make a move here and pay for those revenues when they’re still in the model. Now that we’re at zero, they’ve come out of the Ameritrade model, they’ve come out of Schwab’s model, and I think there’s going to be a lot of synergies here,” Ryan said.

Wells Fargo analyst Christopher Harris said TD Ameritrade’s relationship with TD Bank could cause some complications during the merger process.

“We would suspect TD Bank would ultimately dissolve its banking agreement with AMTD, which is up for renewal in 2021,” Harris wrote in a note. He said eliminating the TD Bank agreement would help Schwab better monetize TD Ameritrade customers’ cash.

Bank of America analyst Michael Carrier said E*TRADE Financial Corp ETFC, which was down 5.3% in early trading, will now feel the heat to respond with its own deal.

“Over time, if firms are left out, it could create some pressure on those stocks, and as the distribution platforms become larger, it could also create a bit more pressure for the asset management industry,” Carrier wrote.

He said the TD Bank relationship could complicate the merger from a regulatory standpoint, but the merger could also create some alternative banking product opportunities for Schwab in the longer term.

Ratings And Price Targets

Wells Fargo has a Market Perform rating and $42 target for Schwab and an Underperform rating and $34 target for TD Ameritrade.

Bank of America has a Neutral rating and $43 price target for Schwab and an Underperform rating and $37 target for TD Ameritrade.

Benzinga’s Take

It’s rare that the market sees a buyout as so bullish for both parties involved, but the price action on Thursday suggests investors see this merger as a win-win situation. Traders should keep a close watch for other potential merger deals in the online broker space.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

How And Why Are Online Brokers Offering Commission-Free Trades?

'Zero Commissions Now A Reality': Wall Street Reacts To Broker Commission Cuts