The financial sector has been strong today, led by merger rumors circling around two of the largest online brokers, E Trade Financial Corp. (NASDAQ: ETFC) and TD Ameritrade Holding (NASDAQ: AMTD), this morning. Both stocks have been moving higher on speculation that a deal could be inked to combine forces.
While it is still way too early to put a price tag on a possible merger, today's report states that one person familiar with the talks between the companies estimates that a merger would result in a new company whose value could approach the $20 billion mark.
What exactly is at stake here? For the two companies, the main benefit from a possible merger would be a nice decrease in costs associated with adding new customers to their services. But that is only the beginning of the benefit. The other side of the coin is something that could hit consumers where it counts the most: transaction costs.
Due to the highly competitive online brokerage market, companies have been pitched against one another recently in a fierce battle to attract and keep customers. By decreasing competition, a merger could (and probably will) allow the new company to lift transaction costs without having to worry about losing as many accounts as it would in a pre-merger environment.
This is not the first time that we have been teased with a possible merger between the two companies, but this time it seems as though discussions are under more pressure to reach a deal. A couple of the reasons that deals were not inked in the past were the inability to reach a compromise on who would be in charge of managing the new entity, and also what degree of control Ameritrade shareholder TD Bank would assert post merger. Both of these issues will undoubtedly be hot topics during this current negotiation as well.
A new wrinkle to the equation this time around is going to be the status of E Trade's mortgage business. E Trade had a bumpy ride last week after rumors started flying over the state of its mortgage business. Shares took a beating following the emergence of concerns over this part of its business, but were able to rebound once the company came out and stated that its mortgage business was indeed in good health. You can be sure that Ameritrade is going to be taking a long hard look at just how stable this portion of E Trade's business actually is at this time.
One thing is for sure, all eyes are going to be watching to see how this one unfolds as millions of investors could eventually deal with the results of a possible merger. As of the end of June, E Trade claimed to have 4.7 million brokerage and banking accounts while TD Ameritrade had 6.3 million such accounts. Combined the two companies would become the largest online broker, surpassing Charles Schwab (NASDAQ: SCHW) which currently sits on the top of the heap with a reported 6.9 million accounts.
We will definitely continue to follow this story, and should a deal actually get put into ink, we will follow up with all the details of the new merger.
Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor's Observer.
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