It was speculated on as early as last May, announced to the public last summer, and then given a near-unanimous thumbs-up by shareholders several weeks ago. Now it's finally official. I'm referring to the union of Ameritrade (NASDAQ:AMTD) and former competitor TD Waterhouse. As of Wednesday, the two companies have joined forces to create TD Ameritrade -- a leading force in the rapidly consolidating online brokerage industry -- which is expected to generate 240,000 trades per day from a pool of nearly $220 billion in combined client assets.
Casual observers might be curious to know why the shares, which closed at $26.10 on Monday, are now changing hands for just $19 and change. That sudden drop reflects the ex-dividend status of the stock, which has been adjusted for a $6 per share special dividend distribution. The one-time payout -- which was financed mostly through borrowing -- was a perk extended to entice shareholders to green-light the $2.9 billion TD Waterhouse deal and fend off the unwanted overtures of rival E*Trade (NYSE:ET). Mission accomplished.
Some have questioned why Ameritrade felt compelled to take on debt in order to alter a business formula that has led to three consecutive years of record earnings. However, I think the benefits of the deal will shine through in time. It's not just the estimated $680 million in annual revenue and cost-cutting synergies -- a figure that was recently revised upward. Nor is it the combined 6 million client accounts, which will collectively place around a quarter of a million trades every single day. It's not even the likelihood of margin expansion, or the combined 40% market share that Ameritrade will control after the merger.
Rather, the key lies in something that Ameritrade has lacked: a network of nearly 150 actual bricks-and-mortar branches, a broader array of products and services, and the advice of trained investment consultants. While previous acquisitions -- seven in all since Joe Moglia took the helm in 2001 -- have expanded the company's client roster, these tools will help attract the business of traditional long-term investors more concerned with comprehensive wealth-management services than simply finding the lowest commission rates. Previously, Ameritrade has had little to offer this high-end segment of the market.
The addition of investment advisory capabilities, along with the firm's commitment to the do-it-yourself crowd, will transform Ameritrade from a no-frills, low-cost provider into something more along the lines of Charles Schwab (NASDAQ:SCHW). More importantly, the purchase will diversify the firm's volatile, transaction-based revenue stream, which is not only susceptible to price wars, but can also quickly dry up when a bear market keeps traders on the sidelines. At the same time, the addition of fee-based investing platforms will help stabilize revenues and provide recurring income that is not tied to trading volume or margin interest.
With the number of online brokers plummeting from more than 200 to around 80, the overcapacity that plagued the industry is slowly disappearing. Still, trading activity and commissions are down roughly 30% and 40%, respectively, from their peaks. Thanks to the merger, though, those statistics are not nearly as troubling as they were just a few days ago.
The TD Waterhouse deal wasn't the only news out of Ameritrade yesterday. Check out the firm's latest earnings report and stronger earnings forecast .
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Charles Schwab is a Motley Fool Stock Advisor recommendation.
Fool contributor Nathan Slaughter owns none of the companies mentioned.
