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The Making of a Mammoth Merger: Charles Schwab and TD Ameritrade

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The Making of a Mammoth Merger: Charles Schwab and TD Ameritrade

Charles Schwab and TD Ameritrade: A Mammoth Merger

In this era of fierce competition in the discount brokerage space, scale might be the best recipe for success.

Charles Schwab has once again sent shockwaves through the financial services industry, announcing its intent to acquire TD Ameritrade. The all-stock deal — valued at approximately $26 billion — will see the two biggest publicly-traded discount brokers combine into a giant entity with over $5 trillion in client assets.

Today we dive into the history of these two companies, and what effect recent events may have on the financial services industry.

The Evolution of Charles Schwab

1975 – U.S. Congress deregulated the stock brokerage industry by stripping the NYSE of the power to determine the commission rates charged by its members. Discount brokers, which focused primarily on buying and selling securities, seized the opportunity to court more seasoned investors who might not require the advice or research offered by established brokers. It was during this transitional period that Charles Schwab opened a small brokerage in San Francisco and bought a seat on the New York Stock Exchange.

1980s – The company experienced rapid growth thanks to a healthy marketing budget and innovations, such as the industry’s first 24-hour quotation service.

This fast success proved to be a double-edged sword. Charles Schwab became the largest discount broker in the U.S. by 1980, but profits were erratic, and the company was forced to rescind an initial public offering. Eventually, the company sold to BankAmerica Corporation for $55 million in stock. A mere four years later, Charles Schwab would purchase his namesake company back for $280 million.

1987 – By the time the company went public, Charles Schwab had five times as many customers as its nearest competitor, and profit margin twice as high as the industry average.

1990s – In the late ’90s, Charles Schwab moved into the top five among all U.S. brokerages, after a decade of steady growth.

2000s – The company made a number of acquisitions, including U.S. Trust, which was one of the nation’s leading wealth management firms, and most recently, the USAA’s brokerage and wealth management business.

The Race to $0

For Charles Schwab, the elimination of fees is the culmination of its founder’s vision of making investing “accessible to all”.

charles schwab falling trade fees

The company’s fees were slowly declining for decades. In late 2019, it finally took the plunge and introduced free online trading for U.S. stocks, exchange-traded funds, and options. The response was immediate and enthusiastic, with clients opening 142,000 new trading accounts in the first month alone.

Although Charles Schwab sent rivals scrambling to match its no-commission trade offer, fintech upstarts like Robinhood have offered free trading for years now. The “race to zero” reflects a broader generational shift, as millennials are simply more likely than earlier generations to expect services to be free.

The Evolution of TD Ameritrade

1975 – The origin of TD Ameritrade can be traced back to First Omaha Securities, a discount broker founded by Joe Ricketts. The company changed its name to TransTerra in 1987.

1988 – TransTerra’s subsidiary, Accutrade, was the first company to introduce touch-tone telephone trading, a major innovation at the time and one of the first early forays into automation.

Early 1990s – Ricketts’s willingness to integrate emerging technologies into the trading business helped his companies achieve impressive growth. In 1997 the company acquired K. Aufhauser & Co., the first company to run a trading website.

The Internet wasn’t a puzzle. We were crystal clear from the beginning that customers would migrate to this.

– Joe Ricketts (2000)

Late 1990s – The Ameritrade brand was solidified after the company changed its name from TransTerra to Ameritrade Holding Corporation in 1996. The newly named company completed an IPO the following year, and established its new brand Ameritrade, Inc., which amalgamated K. Aufhauser, eBroker, and other businesses into a unified entity.

2000s – Ameritrade entered the new millennium as the fifth largest online investment broker in the United States, fueled in part by marketing deals with AOL and MSN.

The modern incarnation of TD Ameritrade took shape in 2006, when TD Bank sold its TD Waterhouse USA brokerage unit to the Ameritrade Holding Corporation in a stock-and-cash deal valued at about $3.3 billion. At the time of the deal the new company ranked first in the U.S. by the number of daily trades.

2016 – TD Ameritrade acquired the discount brokerage Scottrade for about $4 billion. The deal brought 3 million client accounts and $170 billion in assets under management into the company, and quadrupled the size of its branch network.

What Comes Next?

Naturally, the announcement that these massive discount brokers plan to merge has generated a lot of speculation as to what this means for the two companies, and the broader brokerage industry as a whole.

Here are some of the consensus key predictions we’ve seen on the deal, from both media and industry publications:

  • After the deal is approved, the integration process will take 12 to 18 months. The combined company’s headquarters will relocate to a new office park in Westlake, Texas.
  • Charles Schwab’s average revenue per trade has dropped nearly 30% since Q1 2017, so the company will likely use scale to its advantage and monetize other products.
  • The merged company will continue to adopt features from fintech upstarts, such as the option to trade in fractional shares.
  • E*Trade, which was widely considered to be an acquisition target of Schwab or TD Ameritrade, may now face pressure to hunt for a deal elsewhere.

Even though these longtime rivals are now linking up, stiff competition in the financial services market is bound to keep everyone on their toes.

I think Joe Ricketts and I agree that our fierce competitiveness nearly 30 years ago is proof that market competition can be a source of miraculous innovation.

– Charles Schwab

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The 20 Most and Least Profitable Companies, Per Employee

The U.S. companies on the Fortune 500 boast $1.2 trillion in combined profit—but which bring in the best and worst profit per employee?

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The 20 Most and Least Profitable Companies, Per Employee

The Fortune 500 is an elite club of the biggest American businesses, which combined to generate profits of over $1.2 trillion in 2019.

But how much profit do these companies make on a per employee basis?

This visualization uncovers the answer by comparing the 20 companies with the most and least returns per employee, using calculations from Tipalti (based on the Fortune 500 list).

Top 20: Most Profit per Employee

Diving right in, the companies that make the most money per employee may surprise you.

Housing giants Fannie Mae and Freddie Mac take two of the top three spots, bringing in $1.9 million and $1.0 million per employee respectively in 2019.

The two U.S. government sponsored enterprises (GSEs) are major players in the secondary mortgage market, buying and repackaging nearly half the mortgages in the country. The duo was allowed to retain their profits as of October 2019, instead of returning them to the U.S. Treasury.

CompanySectorProfit per EmployeeProfits ($M)Employees
Fannie Mae
(Federal National Mortgage Association)
Financials$1,888,000$14,1607,500
KKRFinancials$1,448,699$2,0051,384
Freddie Mac
(Federal Home Loan Mortgage Corporation)
Financials$1,046,721$7,2146,892
NRG EnergyEnergy$969,631$4,4384,577
EOG ResourcesEnergy$943,103$2,7352,900
BiogenHealth Care$795,811$5,8897,400
Blackstone GroupFinancials$705,680$2,0502,905
ConocoPhillipsEnergy$691,250$7,18910,400
Enterprise Products PartnersEnergy$628,904$4,5917,300
VisaBusiness Services$619,487$12,08019,500
Simon Property GroupFinancials$560,533$2,1023,750
Gilead SciencesHealth Care$456,441$5,38611,800
OneokEnergy$443,789$1,2792,882
FM GlobalFinancials$443,391$2,4795,591
MastercardBusiness Services$436,452$8,11818,600
Cheniere EnergyEnergy$423,529$6481,530
FacebookTechnology$411,308$18,48544,942
AppleTechnology$403,328$55,256137,000
Cincinnati FinancialFinancials$384,038$1,9975,200
Massachusetts Mutual Life InsuranceFinancials$373,989$3,7019,896

Apple employs 137,000 people—the largest workforce by far among the 40 companies profiled—but still makes $403,328 per employee. Facebook is the only other tech giant to bring in more money per employee at $411,308.

Bottom 20: Least Profit per Employee

On the other end of the spectrum, Uber is one of the most well-known companies currently bleeding profits, losing $316K per employee. In fact, the ride-hailing service lost approximately $5.2 billion in the second quarter of 2020 alone.

CompanySectorProfit per EmployeeProfits ($M)Employees
ApacheEnergy-$1,123,301-$3,5533,163
EnLink MidstreamEnergy-$825,830-$1,1191,355
Brighthouse FinancialFinancials-$556,391-$7401,330
PG&EEnergy-$332,870-$7,65623,000
Frontier CommunicationsTelecommunications-$322,706-$5,91118,317
Uber TechnologiesTechnology-$316,208-$8,50626,900
HessEnergy-$229,859-$4081,775
CotyHousehold Products-$199,158-$3,78419,000
Devon EnergyEnergy-$197,222-$3551,800
Altria GroupFood, Beverages & Tobacco-$177,123-$1,2937,300
National Oilwell VarcoEnergy-$175,927-$6,09534,645
Equitable HoldingsFinancials-$171,584-$1,73310,100
Chesapeake EnergyEnergy-$133,913-$3082,300
CenturyLinkTelecommunications-$123,976-$5,26942,500
MosaicChemicals-$84,683-$1,06712,600
AlcoaMaterials-$81,522-$1,12513,800
Targa ResourcesEnergy-$77,985-$2092,680
Voya FinancialFinancials-$58,500-$3516,000
WayfairRetailing-$57,992-$98516,985
Occidental PetroleumEnergy-$46,319-$66714,400

COVID-19 has also had an intense effect on some of the companies at the bottom end of the profit per employee spectrum. Chesapeake Energy and Frontier Communications are just two examples that have filed for Chapter 11 bankruptcy in recent months—they each lost $134K and $322K per employee in 2019 respectively.

I’m pretty confident we will see more bankruptcies than in any business person’s lifetime.

James Hammond, CEO of BankruptcyData

Profit per Employee by Sector

When all the companies in the Fortune 500 are taken into account, sector-specific numbers reveal interesting trends.

Financials bring in the most profit per employee at $116K, while Food and Drug Stores see 17 times less profit at $6.7K per employee. In fact, eight out of the top 20 most profitable companies are found in the financial sector.

SectorProfits per EmployeeProfits ($M)Employees
Financials$116,228$378,4453,256,067
Technology$87,532$252,8362,888,490
Energy$85,547$75,410881,505
Media$57,947$21,634373,333
Health Care$54,679$145,1662,654,872
Telecommunications$50,636$38,251755,417
F&B incl. Tobacco$41,946$42,9241,023,317
Business Services$39,354$36,835936,000
Chemicals$27,977$11,328404,888
Apparel$26,154$7,776297,300
Industrials$25,827$27,0061,045,675
Aerospace & Defence$24,793$23,903964,100
Household Products$24,504$10,415425,038
Transportation$21,762$32,4541,491,358
Engineering & Construction$19,648$6,773344,716
Materials$13,408$6,024449,252
Retailing$10,373$67,3186,489,923
Hotels, Restaurants & Leisure$9,653$16,8801,748,714
Wholesalers$9,025$5,842647,312
Motor Vehicles & Parts$8,113$7,108876,123
Food & Drug Stores$6,746$8,3551,238,645

Interestingly, as a whole, the energy sector comes in third place in terms of profit per employee at $86K—that said, nine out of the bottom 20 least profitable companies are also found in this highly volatile industry.

Though the vast majority of businesses impacted by COVID-19 have been small to mid-sized companies, the above calculations also show that Fortune 500 companies are not safe, either.

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How the S&P 500 Performed During Major Market Crashes

How does the COVID-19 market crash compare to previous financial crises? We navigate different contextual factors impacting crashes.

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How the S&P 500 Performed During Major Market Crashes

Like spectacular market peaks, market crashes have been a persistent feature of the S&P 500 throughout time.

Still, the forces underpinning each rise and fall are often less clear. Take the COVID-19 crash, for example. Despite lagging economic growth and historic unemployment levels, the S&P 500 bounced back 47% in just five months, in a stunning reversal.

Drawing data from Macrotrends, the above infographic compares six historic market crashes—examining the length of their recoveries and the contextual factors influencing their durations.

The Big Picture

How does the current COVID-19 crash of 2020 stack up against previous market crashes?

TitleStart — End DateDuration (Trading Days)% Drop
Black Tuesday / Great Crash*Sep 16, 1929 — Sept 22, 1954300 months (7,256 days)-86%
Nixon Shock / OPEC Oil EmbargoJan 11, 1973 — Jul 17, 198090 months (1,899 days)-48%
Black Monday**Oct 13, 1987 — May 15, 198919 months (402 days)-29%
Dot Com BubbleMar 24, 2000 — May 30, 200786 months (1,808 days)-49%
Global Financial CrisisOct 9, 2007 — Mar 28, 201365 months (1,379 days)-57%
COVID-19 Crash***Feb 19, 2020 — Ongoing5 months+ (117+ days)-34%

Price returns, based on nominal prices
*Black Tuesday occurred about a month after the market peak on Oct 29, 1929
**The market hit a peak on Oct 13th, prior to Black Monday on Oct 19,1987
***As of market close Aug 4, 2020

By far, the longest recovery of this list followed the devastation of Black Tuesday, while the shortest was Black Monday of 1987—where it took 19 months for the market to fully recover.

Let’s take a closer look at each market crash to navigate the economic climate at the time.

After the Fall

What were some factors that can help provide context into the crash?

1929: Black Tuesday / Great Crash

Following Black Tuesday in 1929, the U.S. stock market took 7,256 days—equal to about 25 years—to fully recover from peak to peak. In response to the market crisis, a coalition of banks bought blocks of shares, but with negligible effects. In turn, investors fled the market.

Meanwhile, the Federal Reserve Board rose the discount lending rate to 6%. As a result, borrowing costs climbed for consumers, businesses, and the central banks themselves. The tightening of rates led to unintended consequences, with the economy capitulating into the Great Depression. Of course, factors that contributed to its prolonged recovery have been debated, but these are just a few of the actions that had implications at the time.

1973: Nixon Shock / OPEC Oil Embargo

The Nixon Shock corresponded with a series of economic measures in response to high inflation. Soaring inflation devastated stocks, consuming real returns on capital. Around the same time, the oil embargo also occurred, with OPEC member countries halting oil exports to the U.S. and its allies, causing a severe spike in oil prices. It took seven years for the S&P 500 to return to its previous peak.

1987: Black Monday

While the exact cause of the 1987 crash has been debated, key factors include both the advent of computerized trading systems and overvalued markets.

To curtail the impact of the crash, former Federal Reserve chairman Alan Greenspan aggressively slashed interest rates, repeatedly promising to take great lengths to stabilize the market. The S&P took under two years to recover.

2000: Dot Com Bubble

To curb the stratospheric rise of U.S. tech stocks, the Federal Reserve raised interest rates five times in eight months, sending the markets into a tailspin. Virtually $5 trillion in market value evaporated.

However, a number of well-known companies survived, including eBay and Amazon. At the time, Amazon’s stock price cratered from $107 to $11 while eBay lost 75% of its market value. Meanwhile, a number of Dot Com flops included Pets.com, WorldCom, and FreeInternet.com.

2007: Global Financial Crisis

Relaxed credit policies, the proliferation of subprime mortgages, credit default swaps, and commercial mortgage-backed securities were all factors behind the market turmoil of 2007. As banks carved out risky loans packaged in opaque tranches of debt, risk in the market accelerated.

Similar to 1987, the Federal Reserve initiated a number of rescue actions. Interest rates were brought down to historical levels and $498 billion in bailouts were injected into the financial system. Crisis-related bailouts extended to Fannie Mae and Freddie Mac, the Troubled Asset Relief Program (TARP), the Federal Housing Administration, and others.

2020: COVID-19 Crash

In 2020, historic fiscal stimulus measures along with trillions in Fed financing have factored heavily in its swift reversal. The result has been one of the steepest rallies in S&P 500 history.

At the same time, the economy is mirroring Great Depression-level unemployment numbers, reaching 14.7% in April 2020. In short, this starkly exposes the sharp disconnect between the markets and broader economy.

Bearing Witness

History offers many lessons, and in this case, a view into the shape of a post-coronavirus market recovery.

Although the stock market is likely rallying off Fed liquidity, investor optimism, and the promise of potential vaccines, it’s interesting to note that the trajectory of this crash in some ways resembles the initial rebound shown during the Great Depression—which means we may not be out of the woods quite yet.

As the S&P 500 edges 2% shy of its February peak, could the market post a hastened recovery—or is a protracted downturn in the cards?

This graphic has been inspired by this Reddit post.

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