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Schwab faces uncharted path to integrate $28B TD Ameritrade deal

Wall Street analysts have widely lauded Charles Schwab Corp. for its transformative deal to acquire TD Ameritrade Holding Corp., but navigating the record-setting merger could pose challenges for the brokerage giant.

Capping a wave of disruption in the retail investing landscape, the San Francisco-based brokerage confirmed Nov. 25 that it had agreed to buy TD Ameritrade in an all-stock deal valued at $28.46 billion. The announcement came on the heels of a series of price-cutting moves that led to the elimination of hundreds of millions of dollars in commission revenues across the industry. That has since forced many retail brokers to evaluate the effectiveness of their business models in the age of free trading.

"We're on offense," Schwab President and CEO Walt Bettinger II, who will lead the combined company, said on a call with analysts to discuss the deal. "Although the way this all played out wasn't necessarily planned to come out this way, we think that it worked out well ultimately for the consumer, for the clients that we serve as well as for the stockholders."

By adding TD Ameritrade, Schwab is expected to solidify its place as a financial trading, investing and advice juggernaut. The combined company will have more than $5 trillion in client assets spanning 24 million accounts, in addition to a robust active trading platform and a dominant position in the registered investment advisory custodian business.

There are hurdles Schwab will need to clear first, though.

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The megamerger is expected to close in the second half of 2020, pending shareholder and regulatory approvals. Analysts have speculated that the tie-up could catch the attention of antitrust regulators at the U.S. Department of Justice, given its size and the fact that both companies' businesses are consumer facing. But those analysts also do not believe an investigation into the deal would prevent its closure.

"All of these firms have been pretty kind to consumers," said Steve Biggar, director of financial institutions research at Argus Research, in an interview. "This is where Schwab probably has a first-mover advantage. There are still some other players out there. The next one that tries to combine [with another] is probably going to face more scrutiny because now you're taking four or five large players down to two or three."

If and when the deal closes, the company will embark on an 18-to-36-month integration period unlike any other in the company's nearly 50-year history.

At nearly $30 billion, the TD Ameritrade acquisition represents Schwab's largest deal ever, according to S&P Global Market Intelligence data. It is also nearly 15 times larger than its next-biggest deal of the last decade — the still-pending $1.80 billion purchase of USAA Investment Management Co.'s investment management assets. That deal is expected to close with those businesses integrated into Schwab before the TD Ameritrade onboarding begins, a spokesperson for the company said in an email.

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"Schwab has never done a deal of this scale before," UBS analyst Brennan Hawken said in an interview. "In fact, they really don't have much history as a scale acquirer."

The lengthy integration timeline for TD Ameritrade was designed so Schwab could be "diligent but also careful" as it moves through that process, Bettinger said on the Nov. 25 call with analysts. Schwab COO Joe Martinetto will lead the integration process alongside a team of staff from both companies. That group will start planning for the integration of TD Ameritrade as the companies work to close the deal, said CFO Peter Crawford, who expects decisions related to branch consolidation and real estate to be made relatively quickly.

But the longer the integration period lasts, the more expenses could start to chew into Schwab's accretion expectations for the deal, UBS' Hawken said. The company currently expects the addition of TD Ameritrade to be 10% to 15% accretive to GAAP EPS and 15% to 20% accretive to operating cash EPS in the third year after the acquisition closes. The company will also have to appropriately allocate resources to closing and integrating the overlapping USAA and TD Ameritrade deals. The latter came as a surprise to analysts on several fronts, including the fact that the USAA transaction had not yet been completed.

"When they did the USAA deal, I thought they were getting in the batting cage. They realized they needed practice," Hawken said. "I didn't think they would step into the batting cage and then decide to tear [it] away and start taking live pitches."