As part of the agreement, Ameritrade stockholders will receive 1.0837 Schwab shares for every share held, a 17% premium over the stock's 30-day average price before news of the deal broke. The deal is expected to close in the second half of 2020.
Schwab shares jumped 8% and TD Ameritrade's stock shot up 16% in trading on Thursday and Friday. Shares of TD Ameritrade closed up 7.6% higher to $51.78 on Monday, while Schwab shares rose 2.3% to $49.31.
The merging of the two biggest publicly traded discount brokers will create a mammoth with more than $5 trillion in client assets, $3.8 trillion from Schwab and $1.3 trillion from TD Ameritrade. The combined company will serve more than 24 million clients. San Francisco-based Schwab has a market value of $57.5 billion and Omaha-based TD Ameritrade has a $22.4 billion market cap.
"We believe the combination of our two great companies positions us to be competing and winning in the investment services business for the long run — the very long run," said Charles Schwab president and CEO Walter Bettinger.
Schwab's current shareholders will own 69% and TD Ameritrade's existing stockholders will own 18% of the combined company. TD Bank, which currently owns 43% of TD Ameritrade, will own the proportionate 13% of the new company.
Pending regulatory approval, the integration of the two firms is expected to take 18 months to 36 months after the deal is closed. The company is expecting $1.6 billion in integration spending over three years after closing. The combined company's headquarters will relocate to Schwab's new campus in Westlake, Texas.
The deal will create "a Goliath in Wealth Management," Wells Fargo senior analyst Mike Mayo said in a note to clients on Thursday, when talks of the merger were broken by CNBC's Becky Quick.
More consolidation in the brokerage industry is expected given the massive amount of disruption that has taken place, with all the major brokers dropping commission fees for trading in recent months. Schwab was the first of the major players to make the move, eliminating commissions in early October. Schwab's competitors, including Fidelity and TD Ameritrade, were quick to follow.
After dropping commissions, Schwab and TD Ameritrade's stocks were under pressure as investors worried that the lost commission revenue would pressure margins; however, Schwab proved its free trading is paying off in terms of new client accounts.
While some Wall Street analysts are worried the consolidation of two of the biggest players could flag antitrust issues, the company will only capture about 11% of client assets in the retail financial services market, management said on a conference call on Monday.
The new company will hold over a third of the RIA custody market, JMP Securities estimates.
The advantage to the Schwab-TD Ameritrade deal is the brokerage giant will be able to cut costs, stream new revenue opportunities and improve the platform for clients, said JMP Securities analyst Devin Ryan. Given the high amount of overlapping back-office operations and vendor costs, the company is expecting about $1.8 to $2 billion in cost savings, about 20% of the combined company's cost base.
TD Ameritrade CEO Tim Hockey previously announced plans to step down next February. The companies said Monday they will suspend the CEO search and have named TD Ameritrade Chief Financial Officer Stephen Boyle as TD Ameritrade's interim president and CEO.
TD Securities and J.P. Morgan served as financial advisors to TD Bank and Simpson Thacher & Bartlett LLP served as legal advisor. PJT Partners and Sandler O'Neill served as financial advisors and Wachtell, Lipton, Rosen & Katz acted as legal advisor to the Strategic Development Committee of the Board of Directors of TD Ameritrade. Credit Suisse Securities served as financial advisor to Charles Schwab and Davis Polk & Wardwell served as legal advisor.
The deal came as a shock to analysts on Wall Street, who pegged E-Trade as the most likely acquisition target among the smaller brokers. Shares of E-Trade are lower since news of the deal first broke last week.
The deal will likely pressure smaller brokers like Interactive Brokers, as well as Silicon Valley start-up Robinhood which kick-started free stock trading in 2013.
—with reporting from CNBC's Lauren Hirsch.