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Capital Markets

Discount brokers: Spurned E*Trade left without a date

Ameritrade stays independent and buys TD Waterhouse instead

Ameritrade's decision to reject the takeover advances of rival discount broker E*Trade in favour of an acquisition of its own, could mean that E*Trade itself winds up as a takeover target.

US online broker Ameritrade spurned three offers from E*Trade in favour of a deal of its own with TD Waterhouse USA, a unit of Toronto-Dominion Bank.

The deal with TD Waterhouse will give Ameritrade an instant branch network and a more lucrative client base and will expand its investment advisory business. Analysts, however, view the deal, which is sweetened by a $6 per share dividend payout, funded by bank debt, as expensive. The deal values TD Waterhouse at about $2.25 billion.

Ameritrade and E*Trade could not agree a deal because both wanted to run the show.

"Ameritrade considered its history of successfully integrating acquisitions as a strength," says Robert Hansen, an equity analyst at Standard and Poor's. "Unfortunately, E*Trade failed to study its game theory and is now left without a prom date. E*Trade could now find itself an attractive acquisition candidate to the new TD Ameritrade at some point."

The other big player in the online discount brokerage market, industry heavyweight Charles Schwab, is unlikely to fancy a tie-up, given its history of failed relationships.

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