TD-E*Trade merger chatter continues unabated

SAN FRANCISCO — The jolts that TD Ameritrade Holding Corp. experienced during 18 months of integration following the 2006 merger of TD Waterhouse Group Inc. and Ameritrade Holding Corp. have not dulled its appetite for more deals, according to chairman and chief executive Joe Moglia.
“We’re always looking at opportunities,” he said. Mr. Moglia’s comment followed a spate of media reports sparked by a Wall Street Journal story last Wednesday that renewed speculation about a merger between TD Ameritrade and E*Trade Financial Corp. of New York.
“I would have said that without that article,” Mr. Moglia said. “It’s not a new answer.”
Indeed, Mr. Moglia has long held that his company’s ability to make successful purchases is one of its key strengths.
Putting aside the much talked of — if unsubstantiated — negotiations with E*Trade, the Omaha, Neb., corporation has a deal pending to acquire Denver-based Fiserv Investment Support Services with its $15 billion of custody assets.
But some advisers who use TD Ameritrade are tiring of the turbulence generated by their custodian’s hunger for deals.
“We can handle the bumps, but it’s difficult for clients,” said Jim Elder, president of ElderAdo Financial Inc., which manages $30 million from Montrose, Colo. “My clients are getting dizzy over all this. We’re going to keep our eyes open for another custodian.”

Mr. Moglia acknowledged that financial advisers have experienced difficulties arising from the integration of the platforms during the merger that created TD Ameritrade.
“When you’re moving around billions of dollars, that’s an extremely challenging task,” he said. But Mr. Moglia maintains that the company is undeterred by these challenges.
“The objectives are the objectives, and they don’t change [despite technical challenges],” he added.
Meanwhile, the presumed current round of talks between Mr. Moglia’s company and E*Trade appear to have a better chance of leading to a deal, some analysts said.
For one thing, the cost savings of eliminating one of their two brokerage platforms is harder to resist when unstable markets make profits elusive and uncertain.
On the other hand, the greater scale and complexity of any possible future mergers heightens TD Ameritrade’s awareness of risk, Mr. Moglia said.
“The risk/reward in making a deal is far greater than it was,” he said.

Clash of cultures
One risk factor might arise from a clash of cultures, according to Robert Ellis, New York-based senior analyst of the wealth management division of Celent LLC of Boston. He said that E*Trade is primarily a bank with a banker, Mitch Caplan, as its chief executive. TD Ameritrade is primarily a broker-dealer with Mr. Moglia — a former broker with Merrill Lynch & Co. Inc. of New York — at its head.
“Culturally, the fit is difficult because the bank is dominant culturally at E*Trade, so brokerage is less important,” he said.
Yet E*Trade is moving away from its emphasis on banking, according to Tina Martineau, Boston-based spokeswoman for the company, which holds $213 billion of deposits and securities.
“We were [emphasizing loans] a couple years back during the refinancing boom,” she said, adding that most of the company’s $28 billion of loans on the balance sheet were acquired.
Still, E*Trade’s net operating interest income from loans after provisions for bad ones was still 58% of its net income as of June 30, Ms. Martineau allowed.
TD Ameritrade would do well to merge with E*Trade precisely because of the online broker’s strength in banking, according to Adam Honore, senior analyst with Aite Group LLC of Boston.
“It will put pressure on the wirehouses,” he said. “If you’re sitting there [as a client] with a wirehouse, you’re paying a premium with that [lending and credit] service.”
E*Trade is not downplaying the possibility of a merger.
“Generally speaking, E*Trade Financial’s management team has maintained that there could be tremendous value in industry consolidation if business strategy and operational synergies are aligned,” Pam Erikson, a spokeswoman for E*Trade, wrote in an e-mail.
Schwab on the sidelines
The success Charles Schwab & Co. Inc. of San Francisco is enjoying by providing diverse services, combined with the depressed prices of the shares E*Trade and TD Ameritrade, underscore how much the two companies could gain by merging, Mr. Ellis said. “The upside is that it [would create] another full-service light brokerage firm,” Mr. Honore said. “Schwab is a great example of that.”
And Schwab should not be overlooked in all the merger talk, according to Matt Snowling, an analyst with Friedman Billings Ramsey Group Inc. of Arlington, Va.
“Does Schwab sit idle?” he wrote in a research note published last week.
“Despite Schwab’s lack of interest in the past, the recent sell-off in both [the shares of TD Ameritrade and E*Trade] could entice it off the sidelines.”
Yet Schwab maintains its stance that E*Trade is not an attractive buyout target, said Alison Wertheim, spokeswoman for Schwab.
That’s fine with one TD Ameritrade custody client, who prefers another rough transition to getting swallowed up by one of the industry’s behemoths.
“System consolidation issues will be another pain in the rear [in the event of an E*Trade merger], and we have no reason to believe TD Ameritrade will manage them any better the second time than they did the first,” said Mike Mers, president of Aspen Capital Management of Boise, Idaho, which manages $110 million.
“However, consolidation is going to happen, and [it’s] better to be merging with someone with no institutional business [such as E*Trade] than folding TD’s institutional business into Fidelity [Investments of Boston] or Schwab.”