TD Ameritrade to buy Thinkorswim Group for US$606 million

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This article was published 08/01/2009 (6204 days ago), so information in it may no longer be current.

OMAHA, Neb. – Online brokerage TD Ameritrade Holding Corp. is buying thinkorswim Group Inc. for US$606 million to strengthen its trading business and add new tools for advanced options, futures and other trades.

Ameritrade announced the stock and cash deal Thursday morning. Thinkorswim shareholders will receive $3.34 cash and 0.398 shares of Ameritrade for every share they hold of thinkorswim, which is an online brokerage and investor education provider.

The deal values New York-based thinkorswim shares at about $8.71 per share based on Omaha-based Ameritrade’s closing price Wednesday of $13.48. That represents a premium of about 54 per cent over thinkorswim’s Wednesday closing price of $5.65.

Ameritrade shares (Nasdaq:AMTD) fell 21 cents to US$13.27 in Thursday trading on the Nasdaq stock market while thinkorswim shares (Nasdaq:SWIM) gained $2.59, or nearly 45.8 per cent, to $8.24 on the Nasdaq.

TD Ameritrade, of which Toronto-based TD Bank (TSX:TD) owns a 40 per cent stake, said it expects fiscal 2010 profit to be boosted by between three per cent and seven per cent from the deal. It expects a 10 per cent to 15 per cent boost to earnings a year after the integration is completed, including the benefit of the share repurchases.

“We believe this will be a great opportunity for TD Ameritrade and its customers,” said the bank’s president and chief executive Ed Clark.

“This acquisition will accelerate TD Ameritrade’s growth, as well as enhance its position in the options trading market and the investor education space.”

Ameritrade said it plans to repurchase roughly 28 million shares of outstanding stock, so it will be able to issue that many shares for this deal. That could affect the final price of the deal to TD Ameritrade.

Ameritrade said adding thinkorswim will beef up the company’s trading platform.

“This transaction is directly aligned with our growth strategy, creating scale for the trading side of our business and, more importantly, advancing our trading strategy by several years,” Fred Tomczyk, president and chief executive at TD Ameritrade, said in a statement.

But over the past several years Ameritrade has been working to diversify its revenue stream by adding asset-based revenue while maintaining its fee-based trading revenue, which tends to be more volatile. According to its most recent earnings report, Ameritrade generated nearly 60 per cent of its revenue, or US$377.9 million, from asset-based sources.

It was not immediately clear what the thinkorswim deal will mean for Ameritrade’s revenue breakdown because the companies did not say how much of thinkorswim’s revenue is asset-based. The two companies combined revenue in the 12 months ending Sept. 30 would have been $2.9 billion.

Thinkorswim has 87,000 funded brokerage accounts with more than $3 billion in client assets. And thinkorswim handles about 49,000 stock trades and about 37,000 option trades a day on average.

Ameritrade estimated that if the two companies had been combined in fiscal 2008, they would have handled 73,000 options trades a day and 350,000 stock trades, and they would have managed $281 billion as of Sept. 30.

Robert Ellis, a senior analyst with Boston-based consulting firm Celent, said this deal demonstrates how profitable options trades can be partly because investors who use options trades tend to trade more and partly because brokers can charge higher fees for options trades.

“The acquisition of thinkorswim by TD Ameritrade, at a very substantial price, reflects the growing importance of options in the online brokerage world,” Ellis said.

Lee Barba, thinkorswim’s chairman and chief executive, will have an active role through the transition, and thinkorswim founders Tom Sosnoff and Scott Sheridan will join Ameritrade after the deal closes.

Analysts polled by Thomson Reuters, on average, forecast earnings at Ameritrade of $1.22 per share for fiscal 2010.

The deal is expected to close within the next six months.

In trading on the TSX, TD Bank shares rose 98 cents to C$46.54 on the Toronto Stock Exchange.