TD Ameritrade has agreed to buy Scottrade for $2.7 billion in a deal that would bring together two of the biggest U.S. discount brokerages, but the deal is expected to face scrutiny from regulators.
It is the latest in a wave of consolidation in an industry which has been grappling with intense competition and weak trading volumes as a result of small investors being drawn towards cheaper investment products that track major indexes.
E*Trade Financial Corp, another discount broker, said in July that it would buy online brokerage OptionsHouse for $725 million, while Ally Financial Inc purchased TradeKing Group for about $275 million a month earlier.
In a connected deal, Toronto-Dominion Bank, TD Ameritrade's biggest shareholder, said on Monday it had agreed to buy Scottrade's banking business for $1.3 billion as it continues to ramp up its expansion in the United States.
TD Ameritrade's acquisition of Scottrade combines two of the United States' "big five brokerages," the others being Charles Schwab, Fidelity Investments and E-Trade, and would leave only four major brokers operating in the marketplace.
"I think that the authorities in the United States are unlikely to let this pass without a pretty close look," said John Briggs, an antitrust attorney with the law firm Axinn, Veltrop & Harkrider. "I think the transaction deserves scrutiny and will get scrutiny."
The deal will produce a combined business with around 10 million client accounts and $1 trillion in assets, which will execute around 600,000 trades per day.
TD Ameritrade CEO Tim Hockey said it will leave the combined business well-placed to compete and respond if a price war over commissions accelerates.
"We certainly believe the regulators will look fairly at this deal and will opine," he said in an interview. "I still think this is a considerably competitive marketplace, that's for sure. There are lots of opportunities for additional competitors to get into our space and continue to drive price competition."
Hockey said TD Ameritrade will look at further deals which "make strategic and financial sense" in addition to Scottrade.
TD Ameritrade, 42-percent owned by Toronto Dominion Bank, said it expected annual cost savings of $450 million as a result of the deal, with another $300 million of potential savings identified in the longer term.
As part of those plans, Hockey said around 25 percent of the combined business's 600 branches will be closed. TD Ameritrade currently has 100 branches while Scottrade has 500. Hockey said in the interview the combined workforce of 10,000 will be reduced by about 20 percent.
TD Bank has been expanding aggressively in the United States, growing both its retail and investment banking divisions as it looks to diversify from its home market. It has already grown to be one of the 10 biggest banks in the United States and has a major retail presence with 1,300 branches.
CIBC analyst Robert Sedran questioned whether TD would have purchased Scottrade Bank were it not to help facilitate the transaction for Ameritrade.
"We do not believe TD would have pursued Scottrade Bank as a standalone acquisition," he said.
Shares in TD were up 0.23 percent with TD Ameritrade down 3.4 percent in mid-day trade.
This article was provided by Reuters.