The conquest started with a toll-free telephone number – and a fight with some Bay Street titans.
In 1983, Toronto-Dominion Bank, then the country’s fifth-largest lender, saw what Charles Schwab and Co. was doing in the United States, allowing retail investors to buy and sell stocks cheaply by phone, and decided it wanted in on the action.
The Canadian bank’s proposed product, Green Line Investor Services, had Bay Street up in arms. Back then there was a separation between lenders and traders, and the brokerage industry fought tooth and nail to keep it that way. The battle ended up in front of the Ontario Securities Commission and, in a landmark ruling, TD won.
The next year, in 1984, TD officially launched Green Line. Over the 35 years since, the business has become a smashing success – but the journey has required taking risks as much as smart timing. To get rich off discount stock trading, TD had to make its largest acquisition (at the time, at least) merge with rivals multiple times, and launch an initial public offering at the height of the dot-com boom.
It has all been worth it. On Monday, TD sold its 43-per-cent stake in TD Ameritrade Holding Corp. – the business that Green Line ultimately morphed into – to Charles Schwab Corp., which is buying the entire company for US$26-billion. In return, TD gets a 13.4-per-cent position in North America’s largest discount brokerage.
For all the success, TD’s experiment with discount stock trades took years to break even, an adventure meticulously chronicled in Banking on America: How TD Bank Rose to the Top and Took on the USA by journalist Howard Green. When the business was struggling in its early days, Keith Gray, the TD executive in charge of the project, sought advice from Charles Schwab’s leaders – and they happily provided it. “When we started, they were very kind to me,” Mr. Gray said in an interview.
Asked why they would help a competitor, Mr. Gray said it was a very different time. For one, TD barely had a U.S. footprint in the 1980s. “I was just a Canadian guy coming down to say hello,” Mr. Gray said.
Despite the early losses, TD remained committed to Green Line because its clients tended to keep sizable cash balances. The bank could loan that money out, and that’s where the real profit would materialize in the long run.
But to start making money, Green Line sought scale and acquired Canadian rivals Marathon Brokerage and Gardiner Group, the second- and third-largest players, respectively. Its pathway to exponential growth, though, ran through the U.S. and, in 1996, TD acquired Waterhouse Investor Services Inc. for US$525-million – then the largest deal in TD’s history.
It did not go down smoothly. "Canadian businesses had a long list of disasters south of the border,” former TD executive Bob Kelly, who played a major role in the acquisition, said in an interview. TD was comfortable despite the backlash, he said, because “we weren’t betting the bank with [the deal].” It also helped that Lawrence Waterhouse, who was the principal seller, was happy to take TD stock instead of cash.
The timing was perfect. The dot-com boom took off and online trading did, too. Amid the rush, TD was able to sell a division of Waterhouse called Knight Trading for $717-million and in June, 1999, the bank took TD Waterhouse public, raising $1.1-billion at US$24 a share.
“It’s hard to find a better deal," Mr. Kelly said of Waterhouse’s success. TD was able to take the cash it provided and deploy the money toward its $8-billion acquisition of Canada Trust in 2000.
Waterhouse’s long-term success wasn’t linear, though. After the dot-com bust, the company’s stock price sank and TD bought back the portion it took public for US$9 a share. The bank then spent a few years musing about its future in the United States.
By 2004, TD, led by new chief executive officer Ed Clark, who joined from Canada Trust, decided to go all-in. TD bought a majority stake in Maine-based retail bank Banknorth that year, and in 2005 it merged Waterhouse with American rival Ameritrade Holding Corp. Although TD became a minority shareholder in the merged discount brokerage, it got four board seats and eventually installed Fred Tomczyk, a former Canada Trust banker, as Ameritrade’s CEO.
Under Canadian guidance, TD Ameritrade grew, notably through its acquisition of rival Scottrade Financial Services in 2016. The deal was shepherded by Tim Hockey, another former Canada Trust banker who became Ameritrade’s CEO the same year.
Having consolidated much of the sector and watched its profits balloon, TD is finally walking away, happy to be a much smaller shareholder in a bigger business. No one knows how long it will stay that way, but the success until now, at least, is undeniable.