Schwab Got a Discount on a Brokerage

It cannot have been a fun weekend for Charles Schwab Corp.’s and TD Ameritrade Holding Corp.’s bankers and lawyers. News broke that Schwab was buying Ameritrade on Thursday morning, with the announcement expected as soon as that afternoon, but it didn’t come that afternoon. Or the next day. Neither did a denial. Just sort of frantic pantomime gestures to the effect of “we’re working on it.” Well, they were. And now there’s a deal:

Here’s the press release. When we talked about this deal on Thursday, I pointed out that a key fact in the deal was Schwab’s decision, announced on Oct. 1, to cut commissions on retail brokerage trades to zero. This decision cost Schwab some money and pushed its stock down a bit, though it quickly recovered. But it also forced other discount brokerages, including Ameritrade, to cut their commissions to zero. Ameritrade got a lot more of its revenue from commissions than Schwab did, and the immediate result was that Ameritrade’s stock fell further than Schwab’s did and stayed down longer. Which made it a lot cheaper for Schwab to buy Ameritrade using its own stock as currency. As I put it: “Schwab tanked Ameritrade’s stock price and then got to buy it for cheap.”