Leading Online Options Trader Acquired - January 8, 2009

Which is more challenging, thinking or swimming? For TD Ameritrade Holding Corp. (AMTD), that was not even a contest, as the leader in online equity trading confirmed this morning that the company was purchasing thinkorswim Group Inc. (SWIM) for $605M.

The deal, which will be funded by both cash and stock, is a strategic move by AMTD to gain a better market position within the options trading arena. The agreement consists of AMTD paying $225M in cash, along with issuing 28M shares to current thinkorswim shareholders. That comes out to $3.34 in cash and 0.398 AMTD shares for each outstanding SWIM share.

Upon yesterday’s closing price, TD Ameritrade valued the deal at $8.71 per share for SWIM, a 54% premium over Wednesday’s price of $5.65 per share. With today’s news, shares of SWIM surged more than 45% during the session, trading at $8.23, while shares of AMTD slipped less than 2%, at $13.23 per share.

The acquisition of thinkorswim at such a bargain price, elates TD Ameritrade as the company was in search of company that would be able to provide them with a solid standing with the options world, as the importance of options trading has surged in recent years.

"Options are currently the most profitable part of the online brokerage world, and dedicated firms like OptionsXpress (OXPS) and Thinkorswim have been doing well even through the markets' declines," said Robert Ellis, analyst for Celent LLC. "Options clients trade more, therefore adding more revenue to the brokerage firm."

In the company’s research before making the acquisition, AMTD found that thinkorswim was an industry leader within the options market, posting the highest number of daily retail option trades. To date, SWIM has nearly 87,000 funded brokerage accounts on their books, with each account placing approximately 176 trades per day, or 450 times per year. SWIM also has more than $3B worth in client assets.

Ameritrade CEO Fred Tomczyk went on to say "They have a much more advanced options trading platform, with things such as multi-legging that our active traders have been asking for. We think we're now the best front-end trading platform in the country."

Options are a basic form of derivatives, which allows an investor to buy a form of “insurance” on a stock if they currently own those shares. Options also allow investors a second form of income if they are well versed in this type of trading style.

As for the company that Ameritrade is acquiring, through the first three quarters of 2008, thinkorswim managed to post net income of nearly $50M, ten times that from the previous year. Although the company’s shares price dropped more than 68%, the company’s core business is stronger than ever.

The deal, which is subject to approval by thinkorswim shareholders and by federal antitrust regulators, is scheduled to complete within the next six months.

Ameritrade believes that the purchase of SWIM will boost the company’s fiscal 2010 earnings by between 3% and 7%, while hopefully bringing up those to 10% to 15% once the two companies are fully integrated.

For more information on the stock and options markets check out the wealth of information at BetterTrades.