Ameritrade's Rich Ransom

A long-predicted move toward consolidation in the online brokerage sector began Wednesday with Ameritrade's(AMTD Quote) $2.85 billion all-stock acquisition of TD Waterhouse.

The deal is an expensive one for Ameritrade, which is trying to fend off a semi-hostile takeover attempt by its heretofore bigger rival, E*Trade(ET Quote). Including a special $6 cash dividend to its shareholders -- a gift that will be funded mostly through borrowed money -- the company will oversee the transfer of more than $5 billion in value when all is said and done.

TD Bank Financial, the parent of TD Waterhouse and a division of Canada-based Toronto Dominion(TD Quote), will initially own 32% of the new company, which will be called TD Ameritrade.

The stake will grow to 40% after a post-merger tender offer. Indeed, one of the deal's consequences will be a far greater concentration in Ameritrade's shareholder base. Another 23% of the stock will be controlled by Ameritrade's Ricketts family when the merger is completed.

The deal, which has been speculated for weeks, was announced early afternoon when the stock was trading at $14.99. After the terms became public, shares of Ameritrade soared higher, rising $2.41, or 17%, to $17.23 going into the close.

The merger would create one of the largest online brokers with nearly 6 million customer accounts, about $1.8 billion of annual revenue and more than $200 billion in client assets. The companies claim the transaction will create the largest online brokerage based on daily trading volume.

Wednesday's agreement leaves in the lurch an effort by E*Trade to pick off Ameritrade, which had previously rejected a cash and stock merger offer worth about $5 billion.

Under the deal announced Wednesday, Ameritrade will issue about 190 million shares to TD Bank. The new company will be led by the current Ameritrade CEO Joe Moglia.