Activists Fire Up Ameritrade

Speculation that TD Ameritrade is a buyout target heated up last month as hedge funds including S.A.C. bought positions in the stock.

"With activist shareholders trying to break the TD Bank grip on the company, we believe the shareholders will begin assigning some value to the potential synergies created in a merger with an industry peer," writes Matt Snowling, an analyst at Friedman Billings Ramsey. "While it is still far from clear if either E*Trade or Schwab would be willing to make a bid, we believe the letter could serve as a catalyst to TD Bank to either make a bid for Ameritrade or step aside if an outside offer was presented."

Snowling raised his 12-month price target to $23 from $19. He has an outperform rating on the stock.

Needless to say, if TD Ameritrade were to combine with another broker, the added revenue as well as cost savings from such a combination could be significant.

S.A.C. and Jana see so-called synergies in a merger with Schwab of between $800 and $1 billion, while one with E*Trade could result in cost savings around $400 to $500 million and additional revenue in the range of $100 million on an annual basis.

But some market participants say TD Ameritrade does not have to do a deal right now.

"There are a lot of ways this could go," says Anton Schutz, president of Mendon Capital Advisors and the fund manager to Burnham Financial Services fund. "Does Ameritrade have a lot of downside here? No. Something will be done for it to enhance value, but it may take some time."

Schutz does not own shares of the online brokers.

TD Ameritrade has acknowledged that it needs to expand beyond mere trading. It has turned its attention toward attracting "mass affluent" investors -- those with $100,000 to $1 million of investable assets.