Merger Approved, Schwab and TD Fair Values Increase

After Charles Schwab SCHW announced that the Antitrust Division of the United States Department of Justice decided to close its investigation into the merger of Charles Schwab with TD Ameritrade AMTD and shareholders voted to approve the merger, we are increasing our probability of the deal closing to 100% from 75%. We expect to increase our fair value estimate for wide-moat Charles Schwab to about $44.50 from $42.50 and our fair value estimate for narrow-moat TD Ameritrade to $48 from $46.50. We consider both stocks to be fairly valued at current prices.

As a reminder, the deal is expected to close in the second half of 2020, and TD Ameritrade shareholders will receive 1.0837 shares of Charles Schwab for each TD Ameritrade share. We currently estimate that the combination of the firms will create over $9 billion of additional intrinsic value for shareholders through merger synergies. Arguably more important, the combined firms will become a financial sector powerhouse.

The combined, wide-moat firm will have a competitive position that should solidify its relevance in the financial sector. Financial sector firms are increasingly reaching out beyond their traditional foci (causing a blurring of industry lines) and expanding the firms they compete with. Even before the merger, Charles Schwab grew from its self-directed brokerage business model to wealth management with its Registered Investment Advisorservice, asset management, and, to an extent, banking.

Other financial sector firms have also increasingly encroached on Charles Schwab’s domain. Bank of America, JPMorgan, and Morgan Stanley with its announced merger with E-Trade are targeting self-directed investors. Financial sector firms like Wells Fargo and LPL Financial can also attract registered investment advisors. A combined Charles Schwab-TD Ameritrade with a market cap around $75 billion should be able to effectively compete with the largest financial sector firms.

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