These days, Ameritrade (NASDAQ:AMTD) sure knows what it's like to be the belle of the ball. At the beginning of May, the firm got an unsolicited offer from E*Trade (NYSE:ET). The offer was rebuffed without much delicacy a few days later, when Ameritrade said, "Thanks, but no thanks. We'll be the ones doing the acquiring, folks." Or something like that.
Apparently, Ameritrade meant what it said, which results in the latest hot brokerage hookup rumors. Today, the Financial Times reported that Ameritrade was in talks with Toronto-Dominion Bank (NYSE:TD) about a possible takeover of that firm's TD Waterhouse brokerage. Toronto-Dominion confirmed the talks in a brief statement that released no terms and gave the usual cautions that the whole negotiation could result in nada.
Shareholders bid up both firms today, clearly convinced that some kind of merger and acquisition action is on the horizon, whether it be this deal or another. Some are even suggesting that E*Trade will make a richer offer for Ameritrade.
If the TD Waterhouse deal goes through, and assuming Ameritrade would be the controlling survivor, it would nearly double the firm's current 3.7 million client base.
But at what cost? And what benefit? Analysts are putting a price tag in the range of $2 billion to $3 billion on a possible transaction and throwing out numbers like $620 million as estimates of savings through synergy. Let's hope so, because the trading biz ain't what it used to be. Ameritrade reported that April trading volumes had dropped 30% and lowered its guidance based on the shortfall. And things have been going the same direction at Waterhouse, which recently reported a 16% decline in trading volume.
While the current climate is rewarding investors handsomely, Foolish investors might remember the old saw about being careful what you wish for, in case you actually get it. In the end, this is still an industry where revenues and earnings cycle with fickle investor sentiment and where pricing is going to continue to drop as time goes on. Buy the business accordingly.
For related Foolishness:
- Ameritrade puts on its stalwart, independent stance.
- The original invitation to tango.
- Schwab gets some law and order.
Seth Jayson has accounts at Ameritrade, but at the time of publication, he had positions in no firm mentioned here. View his stock holdings and Fool profile here. Fool rules are here.
