The animal spirits are roiled in the online brokerage universe. Or are they?
On the heels of Ameritrade's acquisition of TD Waterhouse, Charles Schwab Corp. says it isn't for sale. In a statement, chairman and CEO Charles Schwab said the company would remain independent, despite persistent rumors that HSBC Holdings or E*Trade were bidding on the company.
“We have no interest in selling the company,” Schwab said. “We remain firmly committed to our independence, and believe we serve stockholders best by continuing Schwab's strategy as an independent company, focused on providing clients with great service at great value.”
Schwab, pointedly, did not say if any firm has actually made an offer. Takeover and merger rumors abound these days in the retail brokerage space. A number of big deals have already been done this year, including an asset swap between Citigroup and Legg Mason, American Express' spinoff of American Express Financial Advisors and Ameritrade's $2.9 billion acquisition of TD Waterhouse.
For the online brokers, M&A activity is said to be inevitable because of the overcapacity of online trading platforms. Schwab used to record 242,000 daily average revenue trades (DARTs) in the 1990s, says Celent Communications, a Boston-based consultancy. In 2004, DARTs averaged around 156,400. (In May 2005, Schwab reported DARTs of 169,000.) That is why many online brokers are now acting more like full-service companies, offering banking and financial services; online trading is hopelessly cyclical. (See Registered Rep.'s June 2005 issue, “What A Difference A Decade Makes”.)
Indeed, there was a time when online brokers were said to threaten the very existence of flesh-and-blood financial advisors. The Ameritrade-Waterhouse merger seems to indicate that online brokers need a branch network with FAs to survive.
Sanford Bernstein analyst Todd Buechs says the rumors regarding Schwab and HSBC persist because people do not understand what HSBC's real intentions are about establishing a capital markets franchise in the U.S., and because of the fact “that there's no succession plan at Charles Schwab.”