takeover of Fiserv's Institutional Shareholder Services
unit is turning out not to be enough to keep some of its more cranky shareholders quiet. Two hedge funds -- JANA Partners
and S.A.C. Capital Advisors
-- are pushing TD Ameritrade's board to consider a sale or merger with other Web-focused brokerages, including either Charles Schwab
. TD Ameritrade's board revealed the hedge fund lobbying in an 8-k filing
with the SEC on Tuesday.
Whether the hedge fund executives could push TD Ameritrade into play is an open question, as the Omaha, Nebraska-based brokerage firm is controlled by Toronto-Dominion Bank
and the Ricketts
family. Toronto-Dominion owns a 40 percent stake in the firm and the Ricketts hold another 21 percent. Neither of those two parties appear to be seeking a sale of the company.
, managing partner at JANA Partners and Steven Cohen
, CEO of S.A.C. Capital, single out Toronto-Dominion president and CEO W. Edmund Clark
by name as one of the directors holding back a potential deal and note that they have also contacted him to discuss their opinions. Clark told the two hedge funds that both he and the TD Ameritrade board are "unanimously" opposed to a deal with E*Trade. Responding to questions on the letter, a spokesperson for Charles Schwab told the Wall Street Journal
that the San Francisco brokerage sees "no strategic advantage" in purchasing TD Ameritrade.
Still, the lack of interest on the part of all parties is not dissuading the hedge funds for pushing to put the brokerage firm into play. One motivation for them may be to pressure Toronto-Dominion to purchase their stake at a price higher than the current market price.
The two hedge funds informed the TD Ameritrade board through a letter
that they now own 50 million shares in the brokerage, or about 8.3 percent of the company. They also said that they are seeking approval to purchase another $600 million of TD Ameritrade shares.
Rosenstein and Cohen wrote that their due diligence shows that TD Ameritrade "can dramatically increase long-term shareholder value through a combination with E*Trade Financial or Charles Schwab." They add that they believe Toronto-Dominion Bank executives sitting on TD Ameritrade’s board "may be standing in the way of this result." Those executives have a conflict based on their view that TD's ownership and influence on Ameritrade is "critical to its U.S. strategy and necessary to maintain favorable accounting treatment, and the best interests of the majority of shareholders, who seek maximum value for their shares."
To resolve the conflict, the hedge fund executives want TD Ameritrade's board to form a special committee to oversee the "immediate pursuit" of a strategic combination.
They add that Toronto-Dominion should purchase the remainder of TD Ameritrade's outstanding shares at fair market value if it decides not to pursue a deal.
"We believe its [Toronto-Dominion's] concerns should not be a gating item when considering strategic alternatives because a majority of shareholders would, we believe, approve such a combination even over Toronto-Dominion’s objections if given the opportunity. On the other hand, if Toronto-Dominion wishes to insist on dictating strategy for the Company based on its own needs, it has the option to make a bid for the remaining equity and pay shareholders full and fair value," Cohen and Rosenstein wrote.
In making the case for a strategic combination with Schwab or E*Trade, they point to the potential for enormous "cost and revenue synergies, strategic benefits and the opportunity to take advantage of industry dynamics favoring consolidation."
In the case of a sale to Schwab, they believe $800 million to $1 billion of savings would come from overlapping branches, consolidating back office functions such as call centers, reducing advertising spending and eliminating recently announced investments in growth.
A deal with E*Trade would create $450-$500 million of savings, they wrote. That figure includes $100 million from internalizing trades through E*Trade’s in-house market maker, and cross-selling E*’Trade’s offerings including cash products to accumulate greater wallet share of customer assets.
The pair also contends that TD Ameritrade has been unable to "deliver organic growth comparable to the value it has created through acquisitions during an extended bull market," something that TD Ameritrade's board took issue with in their formal response to the investors.
The TD Ameritrade board pointed to what it called "strong" second quarter performance, which included client assets of $282 billion and new account growth up 52 percent from the previous quarter.
The board also reaffirmed that it is committed to growth through mergers and acquisition and evaluates potential deals with its Wilson Sonsini Goodrich & Rosati
and Merrill Lynch
-- its leval counsel and financial advisor, respectively.
The board also confirmed that it has already formed a standing mergers and acquisitions committee, comprised of the three outside independent directors, one designee of the Toronto-Dominion Bank and one designee of the Ricketts shareholders, to evaluate, review and monitor potential deals.
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