TD Ameritrade CEO sees no deal for E*Trade or Scottrade

Wed Dec 5, 2012 4:26pm EST

* Low rates curb opportunity to profit from mergers -Tomczyk

* Balance-sheet issues still weigh on E*Trade

* Privately held Scottrade not interested in selling

By Jed Horowitz

NEW YORK, Dec 5 (Reuters) - TD Ameritrade Holding Corp Chief Executive Fred Tomczyk cast cold water this week on recurrent rumors that the discount brokerage is pursuing a deal to buy Scottrade Financial Services or E*Trade Financial Corp.

"There's two obvious ones that people ask me about, but one is privately held. The individual is not interested," Tomczyk said at a Goldman Sachs conference Tuesday when asked about big acquisition opportunities. "The other one still has some balance sheet issues to work through."

Tomczyk did not identify the firms. Analysts, investors and a person close to TD Ameritrade said they were certain that the firms Tomczyk was referring to were Scottrade, whose biggest shareholder remains its founder, Rodger Riney, and E*Trade.

A spokesman at E*Trade declined to comment. A Scottrade spokeswoman did not return calls for comment.

E*Trade, which expanded beyond discount brokerage into selling mortgages and other consumer loans through an online bank more than a decade ago, has suffered years of losses since the financial crisis. In an indirect reference to E*Trade, Tomczyk said its home equity loan book remains problematic.

Citadel LLC, the hedge fund that is E*Trade's biggest shareholder, pressed directors in 2011 to sell the firm after "nearly four years of value destruction and lost opportunity."

E*Trade has whittled its ailing loan portfolio by billions of dollars, but in October reported an unexpected third-quarter loss that signaled to investors that credit remains a problem.

Tomczyk's pessimism went beyond E*trade to acquisitions in general. When interest rates are so low, "revenue synergies" don't exist, he said, adding that TD Ameritrade is not having "concrete discussions" with anyone.

The real gold in merging discount brokers lies in moving client cash out of money-market funds into bank accounts and investing it at a profit, according to Tomczyk. That can't be done when rates are close to zero and the yield curve is relatively flat.

"It makes transactions harder to do unless you're willing to stand back and say, 'In the long term this will work out,'" he said.  TD Ameritrade, whose major shareholder is Tomczyk's former employer, TD Bank, burgeoned through much of the previous decade through purchases of other brokers and businesses. The Omaha, Nebraska-based firm has not made a large purchase since buying options broker Thinkorswim Group in 2009 for more than $600 million.

"Some people would say, 'Well you're not investing, you can't keep that growth up,'" Tomczyk said. "I can tell you we are investing."

TD Ameritrade had $915 million of cash as of Sept. 30 that it is deploying in hiring salespeople, improving technology and expand into the retirement brokerage business. It also is supplementing its equities-heavy menu with access to potentially higher-yielding - but riskier - products such as futures and foreign exchange, Tomczyk said.

Known primarily for appealing to active, self-directed stock investors, the firm booked 40 percent of its trade volume last quarter from options, futures and foreign exchange transactions.

It also is using cash to salve shareholder issues. TD Ameritrade, which did not pay a dividend until 2010, has raised its 2013 quarterly payout by 50 percent to 9 cents per share. Agreements with TD Bank and the Ricketts family, the founders of TD Ameritrade, restrict the company from doing more share buybacks that would push the bank into a majority shareholder.

Tomczyk said TD Ameritrade has not been able to get either of its principal shareholders to amend their agreements.

Shares of TD Ameritrade closed up 0.6 percent to $16.25 on Wednesday. Shares of E*Trade finished up 2.0 percent at $8.54.

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