Charles Schwab on Monday announced plans to buy discount brokerage rival TD Ameritrade in an all-stock deal valued at $26 billion.
As part of the agreement, Ameritrade stockholders will receive 1.0837 Schwab shares for every share held. The deal is expected to close in the second half of 2020.
Shares of TD Ameritrade rose 2.4% to $49.26 in premarket trading, while Schwab shares climbed about 1% to $48.64.
The merging of the two biggest publicly traded discount brokers will create a mammoth with more than $5 trillion in client assets, $3.8 trillion from Schwab and $1.3 trillion from TD Ameritrade.
The deal will create "a Goliath in Wealth Management," Wells Fargo senior analyst Mike Mayo said in a note to clients on Thursday, when talks of the merger were by CNBC's Becky Quick.
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More consolidation in the brokerage industry is expected given the massive amount of disruption that has taken place, with all the major brokers dropping commission fees for trading in recent months. Schwab was the first of the major players to make the move, eliminating commissions in . Schwab's competitors, including Fidelity and TD Ameritrade, were quick to follow.
After dropping commissions, Schwab and TD Ameritrade's stocks were under pressure as investors worried that the lost commission revenue would pressure margins; however, Schwab proved its free trading is paying off in terms of new client accounts. Schwab has a market value of $57.5 billion and TD Ameritrade has a $22.4 billion market cap.
The advantage to the Schwab-TD Ameritrade deal is the brokerage giant will be able to cut costs, stream new revenue opportunities and improve the platform for clients, said JMP Securities analyst Devin Ryan. Given the high amount of overlapping back-office operations and vendor costs, Stephen Biggar, Argus Research Director of Financial Institutions Research, expects to see about 60% of TD Ameritrade's costs removed following the sale.
This particular deal came as a shock to analysts on Wall Street, who pegged E-Trade as the most-likely acquisition target among the smaller brokers.
The deal will likely pressure smaller brokers like Interactive Brokers, as well as Silicon Valley start-up Robinhood who kick-started free stock trading in 2013.