On Thursday morning, Schwab sent shockwaves around the financial services sector, surging over 8% on reports it was in advanced talks to acquire competing brokerage house TD Ameritrade (NASDAQ: AMTD) for $25 billion.
The prospective deal would create a brokerage giant and increase Schwab's asset base over 30% to $5 trillion, boosting its already dominant share of RIA assets to roughly ~70%.
After years of trickling fee pressure and industry headwinds, we think the deal bears much strategic merit; another classic example of Schwab leaning into its scale-based competitive advantage in a heavy way.
We're also pleased with the timing of the prospective acquisition from a capital allocation standpoint. The rumored deal price would give AMTD shareholders a decent outcome, representing a modest premium to AMTD's last closing price, but is still based on valuations roughly ~20% lower than where AMTD was trading at the beginning of 2018.
This valuation should offer Schwab some healthy near-term EPS accretion, although it remains to be seen whether competitors will let Schwab get scoop up AMTD without at least attempting to bid up the price themselves.
Stay tuned here for more updates - we'll be following this situation closely and will be updating our analyses when/should the official announcement come out.