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Schwab's tie-up with TD Ameritrade expected to draw US antitrust review

Charles Schwab Corp. may have to stop in Washington before crossing the finish line on its largest acquisition ever.

The San Francisco-based brokerage's $26 billion announced acquisition of TD Ameritrade Holding Corp. would cement Schwab's place as a financial powerhouse at a time when many of its peers are still scrambling to deal with the effects of the industry's elimination of commission fees. But antitrust officials at the U.S. Department of Justice are widely expected to conduct a close examination of the megamerger.

"They'll have to take a look at it," said George Hay, an economics and law professor at Cornell University who worked in the Justice Department's antitrust division in the 1970s. "It'll be a fairly elaborate process. It's hard to know what'll come out at the other end."

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The U.S. Department of Justice is expected to take a close look at Charles Schwab's potentially transformative purchase of TD Ameritrade.
Source: Associated Press

Whether the antitrust division has officially launched an investigation into the deal remains unclear. A spokesperson for the DOJ declined to comment, while Schwab did not respond to a request for comment. Industry observers say the odds of an antitrust investigation seem relatively high given the two brokerages' overlapping businesses.

Schwab and TD Ameritrade are both major players when it comes to facilitating mom-and-pop investors' stock trades and safeguarding registered investment advisers', or RIAs', client assets with their custodian businesses. Those parts of the wealth management ecosystem would become much more consolidated if Schwab and TD Ameritrade became one company.

"This deal may face somewhat significant antitrust hurdles, depending on how the competitive market is viewed by relevant authorities," Keefe Bruyette & Woods analyst Kyle Voigt wrote in a research report released ahead of the deal's official announcement.

A combined Schwab and TD Ameritrade is expected to have more than $5 trillion in client assets spanning 24 million accounts.

In the retail trading business, Schwab has about $2 trillion in assets while TD Ameritrade has about $700 billion. The combined company would still trail privately held Fidelity Investments, which Voigt estimated has more than $3 trillion in self-directed retail assets. However, it would become much more of an outsized competitor over smaller independent players in the space, such as E*TRADE Financial Corp., which Voigt said has about $400 billion in retail assets.

The scale benefits would prove especially advantageous in the wake of the price-cutting war that eliminated commission fees at Schwab, TD Ameritrade, Fidelity and E*TRADE. The move to free trading has effectively forced those companies to forgo hundreds of millions of dollars in expected revenues over the coming years, putting newfound pressure on their business outlooks.

The registered investment adviser custodian business stands to become significantly more concentrated with Schwab's acquisition of TD Ameritrade. Schwab already controls about 50% of total RIA custody assets, according to Voigt. With TD Ameritrade's estimated market share about 15% to 20%, Schwab would further increase its lead over No. 2 Fidelity, which has an estimated market share of about 25%, according to Voigt.

Yet, while Wall Street analysts expect antitrust regulators to study the deal, few of them say an investigation would derail the acquisition.

"It's all about how you 'define' the market," Sandler O'Neill analyst Richard Repetto wrote in a Nov. 27 research report. A combined Schwab and TD Ameritrade may represent a massive step toward consolidating the online trading space, but Repetto wrote in his report that the entity would still only have about an 11% market share in the broader retail brokerage industry. And while Schwab will control a majority of the RIA custodian business with TD Ameritrade, Repetto wrote the combined company will still only have about a 10% market share of the broader advisory market.

The companies were likely already in discussions with antitrust regulators about the deal prior to its Nov. 25 announcement as part of complying with U.S. merger regulations, Hay and another former Justice Department official said.

The deal is expected to close in the second half of 2020, and Schwab President and CEO Walt Bettinger II said he was "very confident" in the timeline when analysts asked about antitrust concerns on a Nov. 25 investor call.

"The issue here is less about antitrust," Bettinger said. "It's more about just focusing on differentiating ourselves in a marketplace that is very diverse with our new client size strategy. And the combination is going to allow us to remain competitive in a fierce environment."