Hedge funds push for TD Ameritrade merger

Date: Wednesday, June 6, 2007
Author: Tara Perkins, The Globe and Mail

Jana and SAC Capital accuse majority shareholder TD of 'glaring and untenable conflicts of interest'

Two activist hedge funds have amassed an 8.4-per-cent stake in TD Ameritrade Holding Corp. and are pushing the online brokerage to merge with a rival, while making accusations that Toronto-Dominion Bank would block a deal.

Jana Partners LLC and SAC Capital Advisors LLC wrote a letter to TD Ameritrade's board saying they believe the company could "dramatically increase long-term shareholder value" by combining with E*Trade Financial or Charles Schwab.

"However, we believe that representatives of the Toronto-Dominion Bank on TD Ameritrade's board of directors, despite glaring and untenable conflicts of interest, may be standing in the way of this result for shareholders," said the letter, dated May 29, which was filed with regulators yesterday.

TD Ameritrade shares jumped as much as $2 (U.S.) in after hours trading yesterday when the filing was made public, after closing at $19.953, down 6.8 cents.

TD now owns about 40 per cent of TD Ameritrade, which contributed $63-million to the bank's bottom line last quarter.

"The conflicts arise primarily from the disconnect between the interests of Toronto-Dominion, which views its significant ownership and influence on the company as being critical to its U.S. strategy and necessary to maintain favourable accounting treatment, and the best interest of the majority of shareholders, who seek maximum value for their shares," the letter said.

The funds said they have spoken to TD chief executive officer Ed Clark, and that "Mr. Clark has communicated to us that the board is unanimous in its opposition to a combination with E*Trade."

Such a combination could reap annual cost savings of $450-million to $500-million, the funds argue, adding that "we can only conclude that Toronto-Dominion's self-serving strategic views have distorted the board's analysis."

"Simply put, we believe that Mr. Clark and Toronto-Dominion's other directors are in an untenable position given that Toronto-Dominion's strategic interests conflict with the best interests of a majority of TD Ameritrade shareholders," the letter stated.

"We believe the only solution is for these directors to either step aside and let the board vigorously pursue a strategic combination, or for Toronto-Dominion to purchase the outstanding equity in the company."

The letter closes with a line that says the funds may have to resort to speaking out publicly if action is not taken.

It's signed by Barry Rosenstein, managing partner of Jana, and Steven Cohen, CEO of SAC.

The funds have about 50 million shares of TD Ameritrade, and each has sought regulatory approval to buy additional shares worth more than $600-million (U.S.).

TD spokesman Neil Parmenter said the bank disagrees with the accusations and believes it is aligned with shareholders' interests.

TD Ameritrade's board has 12 directors, five of which are designated by TD, so "we cannot block a move," he said.

For its part, TD Ameritrade said its board is highly focused on its organic growth strategy, but it has had, and expects to continue to have, discussions with peers about mergers.

Yesterday, TD Ameritrade announced that it has hired Fred Tomczyk from TD Bank to become chief operating officer. Mr. Tomczyk was one of TD's designees on Ameritrade's board, and has now stepped down from that role.

Thomas Mullin has been appointed.