Ameritrade Aims to Help Clients Invest: The TD Waterhouse buy propels its strategic shift toward guiding and advising investors

Mergers and acquisitions have been a way of life at Ameritrade Holding Corp. The Omaha, Neb.-based discount brokerage, spurred by the belief that scale is the key to success in the online share-trading market, has bagged eight deals over the past five years, including its acquisition of National Discount Brokers Corp. for $154 million in 2001; its $1.3 billion merger with Datek Online Holdings Corp. in 2002; its Bidwell & Co. buy in 2003; and purchases of the online retail accounts of BrokerageAmerica, Mydiscountbroker.com, Investex Securities Group, and J.B. Oxford & Co. In its biggest score, the company bought rival TD Waterhouse USA from parent TD Bank Financial Group for $2.9 billion in stock last year – a deal the company pursued while spurning a takeover offer from E*Trade Financial Corp. The company adopted its new name, TD Ameritrade Holding Corp. earlier this year. What sets the TD Waterhouse deal apart from Ameritrade’s other acquisitions is that it moves the buyer beyond its discount brokerage roots and advances the company’s relatively recent strategy of expanding relationships with clients and providing them with investment help, notes J. Randy MacDonald, EVP, CFO, and Chief Administrative Officer of TD Ameritrade. Early deals were driven by the company’s plan to be “the premiere active trading platform” in the United States – a position MacDonald states that his company solidified with its first seven deals. Although the TD Waterhouse deal “fit the profile” of a scale merger, he notes, it included a distinguishing feature in that it accelerated Ameritrade’s new strategy by years. TD Waterhouse’s network of independent financial advisers was just what Ameritrade needed to move beyond being a provider of cheap stock trades to being a provider of long-term investing tools. “When we thought about sustainable advantage, and our nimble, low-cost platform, we wondered how we could take that core competency and apply it to some other aspect of the industry,” he adds. Many investors grapple with investment choices and strategy, which MacDonald says suggested a greater need for financial guidance. “When we looked at our typical customer, we had their trades, their trust, but we didn’t have their assets. Although we did roughly 75% of their trades, we only had roughly 25% of their assets,” he says. “We did two to three times more trades than TD but they had two to three times the amount of assets than we had.” MacDonald expects that the shift to an “asset-gathering model” will help his company enjoy a more diverse revenue mix. While trading commissions bring in money, levels of trading can fluctuate with economic cycles, while fees associated with managing assets provide a steadier revenue stream. The shift in strategy requires his company to be more “client-centric” and to offer long-term investment tools, he notes. After reviewing the pool of potential investors in the Unites States, MacDonald says that his company decided to target investors with less than $1 million of investable assets. “They make up roughly one-third of all the people in the U.S. and their collective assets total about $16 trillion. Our sweet spot’ is actually people with more than $100,000 but less than $500,000, because there are very few companies in the U.S. that can profitably service the financial needs of those customers.” (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com