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Ameritrade execs benefit from borrowing

The online brokerage will borrow nearly $2-billion for an acquisition. About a third of that will go to the company's board and top executives.

OMAHA, Neb. - More than a third of the nearly $2-billion online brokerage Ameritrade Holding Corp. plans to borrow to pay for its latest acquisition will go directly to the company's board and top executives in dividends.

Yet despite the increase in borrowing needed to help pay the $6 per share special dividend - offered to encourage shareholders to approve the deal - analysts said this week that Ameritrade's acquisition of competitor TD Waterhouse Group Inc.'s U.S. retail securities business is a good deal.

Ameritrade expects to lead the online brokerage industry in trades after the acquisition by handling an average of 239,000 trades a day and build on its roughly 25 percent share of the active investor market.

By comparison, Charles Schwab Corp. reported 194,000 trades a day, on average, and E-Trade Financial Corp. said it handled 125,000 a day in the quarter that ended in September.

With E-Trade hungry to expand, analysts expect more consolidation in the online brokerage industry.

That makes sense, they say, because acquirers have been able to successfully move customers onto merged trading platforms that allow them to profitably reduce costs.

Ameritrade executives predict the company to be named TD Ameritrade will save about $378-million in annual expenses by consolidating operations and have the opportunity to generate $200-million a year in new revenue.

Ameritrade rejected takeover and merger offers from E-Trade in May and June and vowed to plow ahead with the $2.9-billion deal hammered out in June to acquire TD Waterhouse.

The $6 dividend would be paid to Ameritrade stockholders of record on Nov. 16 if they approve the transaction next month.

The company's board of directors and top executives stand to receive $752.6-million in dividends for the more than 125-million shares they control, according to documents filed with the Securities and Exchange Commission.

Almost $536-million of that will go to Joe Ricketts, Ameritrade's 63-year-old founder and chairman.

Despite the seemingly large payouts to the company's leadership, analysts say the rationale for the takeover remains sound.

Ameritrade should benefit because the company will be able to add financial advising and diversify its business, said analyst Seth Dadds of Garp Research Corp. in Baltimore.

"If you want to go out and compete with the (Charles) Schwabs of the world, you have to have some kind of advising business," he said.

Matthew Snowling, an analyst with Friedman, Billings, Ramsey and Co. in Arlington, Va., said Ameritrade needed to make an acquisition because the online brokerage industry is rapidly consolidating. E-Trade, spurned by Ameritrade, instead bought rival online traders HarrisDirect and BrownCo.

"One could argue they played E-Trade and TD against each other until they got the best deal for themselves," Snowling said.

Details of what the deal will mean for Ameritrade and TD Waterhouse customers haven't been fully released, but Becker said Ameritrade has tried to keep customers informed through its corporate Web site, www.amtd.com

Generally, the owners of TD Waterhouse's 2.3-million accounts will have to adjust to using Ameritrade's trading platform, and the owners of Ameritrade's 3.7-million accounts can expect to be offered investment advice through a nationwide network of branch offices created out of TD Waterhouse's 143 offices.

Company officials plan to design investment products, like the research and advising products TD Waterhouse offers, to attract long-term investors, particularly those who may not have enough money to attract a full-fledged broker.

Some products will be designed to serve registered investment advisers who may use TD Waterhouse's research or trading tools to help their clients.

In the past, Ameritrade depended on trading commissions for most of its revenue.

The new company will also be able to charge asset-based fees for advice.

The combined company will have the third-largest account base in the brokerage industry with about 5.9-million accounts, according to figures from March before the deal was announced. TD Ameritrade expects to manage about $219-billion in client assets.

A special shareholder meeting will be on Jan. 4 for the vote on this acquisition, and the deal is expected to close on Jan. 24.

[Last modified December 17, 2005, 01:00:13]