E-Trade May Acquire TD Waterhouse

The deal would give E-Trade a base to broaden its services beyond online brokerage offerings.
E-Trade Financial Corp. is in discussions with TD Bank Financial Group about acquiring the U.S. operations of its TD Waterhouse discount brokerage unit, analysts say. The combined entity would have about 5 million customer accounts, placing it ahead of Ameritrade Holding Corp., which has 3 million accounts, but behind discount brokerage leader Charles Schwab & Co., which has 8 million. In a statement, E-Trade confirmed that it's holding talks with TD Bank but said neither side would have further comment until a deal is consummated. An E-Trade spokesperson declined to comment.

With its more affluent clientele and a network of branches and investment advisers, TD Waterhouse can offer E-Trade a base to broaden its services beyond online brokerage. For several years, E-Trade has been providing traditional banking and lending services in addition to brokerage; $11 billion--about 15% of its total assets--are in the form of checking accounts, and it's also an active mortgage lender.

TD Waterhouse, created in 1996 when TD Bank acquired Waterhouse Investor Services, is one of the "last remaining scale players in the online brokerage space," says Colin Clark, research analyst at Merrill Lynch. Acquiring it would be a coup for E-Trade; its two main rivals, Schwab and Ameritrade, are said to have also been eyeing it. TD Bank, for its part, is looking for a brand-name partner with which to expand its U.S. retail investment activities; it would likely retain a stake in the E-Trade-TD Waterhouse entity.

One major impetus for the deal would be cost savings; Ameritrade's decision to buy Datek Online in 2002 was driven largely by the opportunity to wring out savings by merging the companies' online trading systems, Clark says.

The E-Trade-TD Waterhouse deal would signify a "further maturation and contraction of the retail brokerage space," says Dennis Ceru, director of retail brokerage and investment research at TowerGroup. The retail brokerage business, which tends to be highly correlated with stock prices, began a resurgence last year following the close of the bear market that was ushered in by the dot-com collapse.

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