JANA and SAC Send New Letter to TD Ameritrade (AMTD)
The firms called on the Board to create a special committee free from influence by the company's largest shareholder (TD) to explore such combinations.
The firms also provided an analysis of what they called the "massive value creation opportunity" inherent in a combination with E*Trade Financial or Charles Schwab. The analysis is available at www.5464654545741.com.
A Copy of the Letter:
We read with great interest the statement issued this week by TD Ameritrade Holding Corporation ("TD Ameritrade" or the "Company") in response to our letter to the Company's Board of Directors (the "Board"). Given that we have heard nothing else from the Company, we assume that this represents the Board's response to our letter. Simply put, nothing contained in the Company's statement changes our belief that the time to enter into a value- maximizing strategic combination is now or our belief that the interests of Toronto- Dominion Bank ("Toronto-Dominion") conflict with those of all other shareholders and are impeding the possibility of such a transaction. Moreover, we were astounded by the Company's comments regarding its review of strategic combinations, which indicated to us that the members of the Board who are meant to be independent of Toronto-Dominion do not adequately grasp the magnitude of the conflicts of interest arising from Toronto-Dominion's influence on its strategic review process and only re-enforces our belief that the Board must act immediately to eliminate these conflicts.
Value Creation Opportunity. We note that the Board has not challenged our primary assertion that a strategic combination with E*Trade Financial ("E*Trade) or Charles Schwab ("Schwab") presents a massive value creation opportunity, nor do we believe they could credibly do so. Instead, the Company's response focuses on the timing of such a combination, claiming that such a transaction " must occur at the right time and be consistent with TD Ameritrade's business strategy." Quite frankly, we fail to see how an unbiased review could leave any doubt that the "right time" to pursue such a combination is now. This is particularly true given that the Company has now completed its integration of TD Waterhouse and that the currently favorable industry environment for transactions will most assuredly not last forever, creating the real risk that if the Board continues to wait it will have permanently squandered this opportunity.
In fact, if the Board truly believes that entering into a strategic combination now would not create the highest possible long-term value for TD Ameritrade shareholders, we believe it is the Board's duty to explain to shareholders why this is the case, which will require more than general references to optimal timing or business strategy. Moreover, the Board would have to explain how it can hope to create more value through organic growth when the history of the industry and the Company's own history clearly indicate that consolidation has long been the key value driver in the discount brokerage sector, while organic growth has and continues to be highly challenging.
TD Ameritrade has poured over $200 million into advertising since the merger with TD Waterhouse and maintains over 100 branches at an estimated annual cost of $75 million, yet has produced little in the way of asset growth. In the 12 months ended March 31, 2007, the number of total customer accounts has grown by less than 3%, and the number of more valuable qualified accounts (those with more than $2,000 in assets) has actually declined. In addition, total client assets in this time have only grown by approximately 7%, while the S&P 500 Index has grown over 10% during the same period. It is true as the Company pointed out in its response that it saw a significant increase in gross new account openings during the second quarter of 2007 compared to the first quarter of 2007. However, this increase overstates account growth given that the December quarter (the first quarter) is generally a weaker gross new account opening quarter and the March quarter (the second quarter) is generally the strongest ( due to tax season, year end bonus payments and other seasonal factors). Therefore, this growth says nothing about the success of the Company's fledgling mass affluent strategy or efforts to improve marketing efficiency. We believe the Company's stock performance immediately following the release of its most recent quarterly results demonstrates that the market shares our view of the Company's organic growth prospects.
In order to more fully set forth the immediate value creation opportunity that a strategic combination presents, we have provided for the Board's review a detailed analysis (which is available at www.5464654545741.com) of the long- term shareholder value which can be created by a strategic combination. As our analysis sets forth in more detail, the synergies in such a combination would be enormous, with annual net near-term synergies totaling $600 million in the case of E*Trade and $800 million in the case of Schwab, which when capitalized generates billions in long-term value for shareholders. Also, as discussed further in our analysis, each combination offers compelling strategic benefits for all parties, including the benefits of a broader product offering and deeper customer relationships which will translate into increased "wallet share" of customer assets. While we understand that Schwab representatives have publicly expressed skepticism regarding such a combination, we believe that if the Board were vigorously pursuing a transaction with no onerous pre-conditions set by Toronto-Dominion it could convince Schwab's leadership of the merits of such a combination given the verifiably significant synergies it would create.
Board Conflicts. The Company's response also does nothing to allay our concerns that glaring conflicts of interest on the Board are standing in the way of maximum value creation for shareholders or our belief that the Board's independent members have a fiduciary obligation to cleanse the Board's exploration of strategic combinations of such conflicts. These conflicts include:
* It is well known that Toronto-Dominion views its TD Ameritrade stake as a key strategic asset, rather than a pure investment. Just last month, when Toronto-Dominion President & CEO (and TD Ameritrade Board member) W. Edmund Clark was asked on an earnings call why Toronto-Dominion retains its 40% stake despite the obvious value to others, he responded, "Probably because it's very valuable to me." Mr. Clark then went on to list the strategic benefits to Toronto-Dominion of holding the stake, which included providing Toronto-Dominion a growth strategy in the U.S. and building brand equity for Toronto-Dominion through TD Ameritrade's "heavy advertising" (demonstrating an eagerness to see TD Ameritrade resources squandered for Toronto-Dominion's benefit which is highly troubling). Further evidence can be found in the recent high turnover of Company management and replacement by former Toronto-Dominion executives, many of whom came from industry laggard TD Waterhouse. In fact, we find it highly troubling that the Company chose to combine its response with the announcement that another Toronto-Dominion executive would be joining TD Ameritrade, apparently as a successor-in-waiting to Mr. Moglia.
* Depending on the transaction structure, a strategic combination with Schwab or E*Trade could diminish Toronto-Dominion's ownership stake and Board representation to the point that Toronto-Dominion would be deprived of the favorable accounting treatment which allows it to report its share of TD Ameritrade earnings.
* A strategic combination with E*Trade would give the combined entity broad banking capabilities, eliminating the Company's reliance on Toronto-Dominion's banking function and reducing Toronto-Dominion's influence, and would not fit into Toronto-Dominion's branch-based banking strategy in the U.S.
The Company's response states that the Board when considering possible strategic combinations seeks the advice of various "independent" legal and financial advisors. However, while we have no doubt that the Board employs such advisors, the fact remains that it allows a representative of Toronto- Dominion to sit on the Board committee which reviews possible strategic transactions despite the glaring conflicts described above. Moreover, we believe that the looming presence of Toronto-Dominion over the exploration of any such combination by this Board committee, particularly with what we understand to be Toronto-Dominion's pre-conditions for a transaction including maintaining certain levels of ownership and board representation in any combined entity, has had a chilling effect on the possibility of such a transaction.
We find it astounding that the independent members of the Board have not done more to cleanse the Board's review of strategic combinations of influence by Toronto-Dominion. Specifically, we believe that the Board must create a special committee, without participation by the directors selected by Toronto- Dominion, to oversee the immediate pursuit of a strategic combination without interference by Toronto-Dominion. Toronto-Dominion may if it chooses oppose such a transaction, but its concerns cannot be given preeminence given that a majority of shareholders could approve such a combination even over Toronto- Dominion's objections. Alternately, if Toronto-Dominion wishes to prevent this result, it can offer other shareholders full and fair value for their stakes. Forcing shareholders to wait however until the optimal time for Toronto-Dominion to make such a bid (which may mean waiting for Toronto- Dominion to improve its capital position) is unacceptable, particularly given its history in the case of TD Banknorth and TD Waterhouse of waiting for the share price of companies in which it holds a large stake to fall considerably before purchasing the remainder of the equity.
We believe that the light of day is a powerful asset for shareholders and we welcome the Board's opening of a public discussion of these matters. Additionally, given the Board's desire to address these matters in full public view, we believe it is all the more important that shareholders have a full and accurate accounting of the Board's actions with respect to possible strategic combinations, so that they may judge for themselves the Board's conduct and whether each director has honored his fiduciary duties. Therefore, we will be sending the Company shortly a books and records request under Delaware law for documents related to the Board's analysis of and discussions regarding potential strategic transactions and related matters, including any instances where Toronto-Dominion's interests have come into conflict with those of all other TD Ameritrade shareholders.
We look forward to the Board's timely response.
JANA Partners LLC
Steven A. Cohen
S.A.C. Capital Advisors, LLC
Chief Executive Officer