Friday, June 08, 2007

Hedge Funds Push for TD Ameritrade to Merge with Rivals

Bloomberg, Bradley Keoun, 8 June 2007

TD Ameritrade Holding Corp. received a demand from Jana Partners LLC and SAC Capital Advisors LLC for records of board discussions, a week after the hedge funds began pushing the third-biggest online broker to find a merger partner.

The records will let shareholders ``judge for themselves the board's conduct and whether each director has honored his fiduciary duties,'' Jana Managing Partner Barry Rosenstein and SAC Chief Executive Officer Steven A. Cohen wrote in a letter dated today.

The fund managers said in a May 29 letter they'd taken a combined 8.4 percent stake in the Omaha, Nebraska-based company, and they accused Toronto-Dominion Bank, TD Ameritrade's largest shareholder, of blocking a merger for its own benefit. They said the Canadian bank, which owns 40 percent of TD Ameritrade and appoints five of the 12 board members, uses the brokerage's resources to boost Toronto-Dominion's expansion in the U.S.

``We find it astounding that the independent members of the board have not done more to cleanse the board's review of strategic combinations of influence by Toronto-Dominion,'' the fund managers wrote. A request for documents under the laws of Delaware, where TD Ameritrade is incorporated, will be sent ``shortly,'' their letter said.

Shares of TD Ameritrade rose 93 cents, or 4.7 percent, to $20.93 at 4 p.m. New York time in Nasdaq Stock Market trading. They've gained 29 percent this year.

A merger with Charles Schwab Corp., the biggest online broker, could produce annual benefits of $800 million, while a deal with E*Trade Financial Corp., the fourth-largest, could produce $600 million, the hedge funds said today. The funds also produced a 21-page analysis of potential combinations.

TD Ameritrade said June 5 in response to the funds' first letter that it was open to a transaction at the right time with the right partner.

``We fail to see how an unbiased review could leave any doubt that the `right time' to pursue such a combination is now,'' the hedge funds wrote today. ``The currently favorable industry environment for transactions will most assuredly not last forever, creating the real risk that if the board continues to wait, it will have permanently squandered this opportunity.''

TD Ameritrade spokeswoman Katrina Becker confirmed the company received the letter.

``We are always talking with our peers in the industry about consolidation,'' Becker said in response to a question about whether there are any current merger discussions. ``We have been and will continue to talk.''

Schwab, based in San Francisco, said this week it's not interested in TD Ameritrade, and New York-based E*Trade didn't comment. Schwab shares rose 2.4 percent to $21.73, while E*Trade rose 4.3 percent to $25.21.

At an investment conference in New York yesterday, CEO Joseph Moglia said Cohen and Rosenstein had created a ``media- type of distraction'' that ``takes more of my effort'' away from running the company.

``They're doing their job, they're doing what they feel they have to do,'' he said of the two fund managers. ``Whether or not that may be beneficial for all shareholders, I think that's a question mark.''

Toronto-Dominion spokesman Neil Parmenter said today that the bank's ``position hasn't changed, which is that anything's on the table, anything's possible.''

The hedge funds' letter said Toronto-Dominion's representatives may have set preconditions for any merger, including keeping a minimum stake and board representation in the resulting company.

``We're not going to debate them line by line,'' Parmenter said. ``The bottom-line message is that our interests are aligned with those of the other TD Ameritrade shareholders.''

The demand for records is ``a shot across the bow at the directors, saying, you better pay attention to everybody, not just the one who put you on board,'' said Larry Hamermesh, a professor at Widener University School of Law in Wilmington, Delaware.

The request is unlikely to succeed without more specific allegations of misconduct, Hamermesh said.

Jana's Rosenstein, 48, a former Merrill Lynch & Co. investment banker, is known for taking stakes in companies alongside billionaire investor Carl Icahn and pressing managers and directors to boost their stock prices. Targets have included Time Warner Inc. and Kerr-McGee Corp. Last month Rosenstein urged aluminum maker Alcoa Inc. to drop a planned takeover of Alcan Inc. and consider putting itself up for sale.

SAC's Cohen, 50, founded his firm in 1992 and also took part in Icahn's Time Warner campaign. Alpha magazine reported Cohen earned $900 million last year, and last month he bought an Andy Warhol image of Marilyn Monroe, ``Turquoise Marilyn'' for an estimated $80 million. His fund manages about $12 billion.
Bloomberg, Sean B. Pasternak, 7 June 2007

TD Ameritrade Holding Corp., the third-largest online brokerage, signaled that Fredric Tomczyk, the new chief operating officer, will probably succeed Joseph Moglia once he steps down as the top executive.

Tomczyk, appointed COO this week, will receive $3.2 million in salary and bonuses if he isn't named chief executive officer within six months of Moglia leaving, according to a June 5 filing with U.S. regulators. Moglia, 58, hasn't indicated when he plans to retire, and signed a five-year contract about a year ago.

``He does appear to be the heir apparent,'' Matt Snowling, an analyst at Friedman Billings Ramsey in Arlington, Virginia, said today in a telephone interview. Tomczyk was an executive for seven years at Toronto-Dominion Bank, TD Ameritrade's biggest shareholder.

Tomczyk's appointment was announced the same day that hedge funds Jana Partners LLC and SAC Capital Advisors LLC urged the Omaha, Nebraska-based firm to merge with a rival, such as E*Trade Financial Corp. The funds said that Toronto-Dominion is blocking a merger to preserve its own U.S. strategy.

Tomczyk, 51, a former vice chairman at Toronto-Dominion, signed a five-year contract that takes effect July 2, the filing showed. Toronto-Dominion, Canada's third-biggest lender, owns 40 percent of TD Ameritrade.

The contract states that if he doesn't become CEO, Tomcyzk will receive a base salary of $500,000 a year for two years, a cash incentive of $1.1 million a year for two years, and vesting of all equity grants, according to the filing.

Tomczyk is a ``strong internal candidate'' to succeed Moglia, although the board would determine his successor, TD Ameritrade spokeswoman Katrina Becker said. He is the only executive at TD Ameritrade with this stipulation in his contract, she said.

Moglia has said that consolidation is good for the industry and that he'd consider all possibilities for mergers. He declined today to comment on the merits of the hedge funds' proposal.

Becker said that Moglia had a private meeting with representatives of Jana and SAC at a conference today in New York hosted by the investment bank Sandler O'Neill & Partners.

The hedge funds claim that Toronto-Dominion's directors on TD Ameritrade's board have a conflict of interest, and are ``putting Toronto-Dominion's strategic desires'' above the needs of TD Ameritrade shareholders.

Tomczyk wouldn't be the first Toronto-Dominion executive to move to one of the bank's U.S. businesses. The bank named former Vice Chairman Bharat Masrani CEO of the Portland, Maine-based TD Banknorth consumer bank.
Financial Post, David Pett, 7 June 2007

Toronto-Dominion Bank shares took a hit Wednesday after two U.S. hedge funds stirred the pot at TD Ameritrade, asking the company's board to consider strategic options that would create more value for shareholders

S.A.C. Capital Advisors and JANA Partners LLC, who together have an 8.4% stake in TD Ameritrade, want the U.S. brokerage to merge with a rival and said TD Bank, which holds a 40% ownership stake in TD Ameritrade, is blocking any such deal.

For Toronto Dominion, the potential outcome is far from ideal, Blackmont analyst Brad Smith said in a note to clients.

He sees four possibilities arising from the request. TD Bank could participate in a combination transaction that would bring TD Ameritrade together with a competitor like eTrade or Charles Schwab, which would reduce TD Bank's interest and improve operating prospects.

The company could also decide to sell TD Ameritrade outright into a bid that Mr. Smith expects would yield approximately US$1-billion plus a pre-tax gain. Wowever, it would also leave its U.S. strategy at a loss.

Or, TD Bank could decide to bid for the remaining TD Ameritrade shares. This option would cost about $9-billion and force about $3-billion to $4-billion in equity issuance, deflating capital costs ratios in the process.

In Mr. Smith's opinion, the option probably most preferred by TD Bank, at least for the time being, is to do nothing.

They'd like to be given some time to execute their plan, he said in an interview, but added that it is unlikely they can withstand the pressure for change very long.

He maintained his "hold" recommendation and $73 price target on the TD Bank shares.
The Globe and Mail, Tara Perkins, 7 June 2007

TD Ameritrade Holding Corp. has been, and will continue, talking to rivals about potential deals, the company said yesterday after two powerful activist hedge funds began agitating for a merger or acquisition.

"M&A is a part of what we do on a daily basis," spokeswoman Katrina Becker said.

"You should assume we've been talking to people in the industry all along and we would continue to do that," chief executive officer Joe Moglia said in an interview with CNBC yesterday.

TD Ameritrade revealed this week that Jana Partners LLC and SAC Capital Advisors LLC have built up an 8.4-per-cent stake in the online brokerage, and are pushing it to combine with E*Trade Group Inc. or Charles Schwab Corp.

In a letter to TD Ameritrade's board, the hedge funds accused TD Bank of "glaring and untenable conflicts of interest" that might be causing the Canadian bank to stand in the way of a deal.

The letter was signed by Jana's managing partner, Barry Rosenstein, and SAC's Steven Cohen.

"This letter increased significantly the chances that a deal takes place," James Ellman, president of Seacliff Capital in San Francisco, told Bloomberg News.

But at least one of the potential partners, Charles Schwab, says it's not interested.

"As we have said before, we don't see any significant strategic advantage that such an acquisition would provide - either in terms of new capabilities or long-term growth," spokesman Glen Mathison said in an e-mail.

E*Trade Financial spokeswoman Pam Erickson declined to comment.

In their letter, the hedge funds said a combination of TD Ameritrade and E*Trade could generate annual cost savings of $450-million to $500-million by combining assets into one platform and cutting duplicate costs. They further estimated that annual revenue synergies could top $100-million.

The funds alleged that Toronto-Dominion's strategic interests conflict with those of TD Ameritrade's shareholders, and that the only solution was for the TD directors to step aside and allow the brokerage to pursue a strategic combination, or for the bank to buy TD Ameritrade outright.

But TD is unlikely to make an offer for the brokerage at this point, observers said. It is barred from increasing its ownership beyond 39.9 per cent until January 2009, and beyond 45 per cent for another six years after that.

"We believe that TD has little motivation to respond to these developments by paying a premium for an increased stake," UBS Investment Research analyst Jason Bilodeau wrote in a note to clients yesterday.
The Globe and Mail, Derek DeCloet, 7 June 2007

Activist hedge funds are a wonder of capitalism. They bring new life to businesses once given up for dead, light a spark underneath complacent executives, and expose incompetence in the boardroom. They do all this, with generally positive results, knowing that other investors will get a free ride as a result of their labours.

They don't mind. They're good Samaritans that way. Except when they're being bullies, or advancing silly arguments, or telling half-truths in pursuit of a quick profit - or when they're going after companies that are doing just fine without their help.

On which side does the TD Ameritrade case fall? Stock prices don't tell you everything, but in the long run they're a decent measure of management and the board. Including dividends, TD Ameritrade shareholders have made 38 per cent, compounded annually, over the past five years, 37 per cent over the past 10 (to May 31). Long-term results like that usually shield a company from hedgies bearing unsolicited advice. Not any longer.

No one has ever accused SAC Capital, Ameritrade's new antagonist, of thinking long-term or, for that matter, being able to spell it. Dollar-store pantyhose last longer than a typical SAC investment. Last year, in an interview with The Wall Street Journal, founder Steve Cohen admitted that competition from other hedge funds made it harder to execute rapid-trading strategies, forcing the firm to hold stocks for longer - six months, sometimes even a whole year. Warren Buffett, they're not.

Even so, rare is the company that can escape without bruises when standing up to Mr. Cohen's group. Ameritrade and its largest shareholder, Toronto-Dominion Bank, are going to try. SAC and New York hedge fund Jana Partners think Ameritrade should merge with one of its two main rivals and say TD Bank and Ed Clark, its CEO, are standing in the way. Mr. Clark's strategy is to politely tell the hedge funds to go pound sand. It might work.

Round 1 went to the hedgies, if only for the way the press overstated their power and their investment. One newspaper reported that the funds had "quickly acquired 8.4 per cent of the shares" in Ameritrade. Uh, not quite. If they really owned that much, they'd have filed a 13D, a mandatory disclosure for activist shareholders who own 5 per cent or more of a U.S. stock. They haven't, because they don't.

Their 8.4-per-cent "economic interest" is, in large part, derivatives. This is a favourite tactic now of some hedge funds. You acquire a bunch of call options, then bluster your way into making people think you're a major shareholder, without having to pay the price of admission. Put up or shut up? The modern hedge fund manager does neither.

No matter: The fact is that Jana and SAC could acquire that 8.4-per-cent stake if they wanted to. What's less clear is where that would get them. TD Bank owns 40 per cent of Ameritrade and the founding Ricketts family has another 21 per cent. They control the board legitimately, through majority ownership. So a proxy battle seems impossible.

That doesn't absolve Mr. Clark of his responsibility to act in the interests of all Ameritrade shareholders, though. SAC and Jana's allegation is that the brokerage firm won't talk merger with E*Trade Financial or Charles Schwab because TD Bank doesn't want to dilute its large minority stake, lest it lose influence. TD provides some banking services to TD Ameritrade customers; the latter also gives the TD name some added recognition in the U.S., which can't hurt the parent bank's retail banking operation. Schwab isn't interested, but could Mr. Clark be obstructing a marriage with E*Trade to preserve those side benefits? The proof, says a source at Jana, is that such a merger hasn't happened yet despite the "indisputable" benefits, like $450-million (U.S.) in cost savings.

No one, certainly not Mr. Clark, is dopey enough to claim that there aren't huge gains from brokerage mergers. But scratch a little harder and the idea of an E*Trade deal gets less compelling, at least right now. Perhaps you have read an article or 50 on the U.S. housing market. One of E*Trade's strategies for growth has been to do some higher-risk lending - mortgages, for instance, in places like California. In the most recent quarter, the company reported $111-million in bad real estate loans, up 66 per cent, according to Citigroup.

If that continues, Ameritrade should soon enjoy a much better valuation in the market than its rival. That would be a good time to pursue a deal, but can you blame management for wanting to wait? The hedge funds' outburst says a lot more about their need to find fresh targets than it does about Ameritrade, TD or Mr. Clark.
BMO Capital Markets, 6 June 2007

In an SEC filing released yesterday, TD Ameritrade included a copy of a letter it had received from two U.S. hedge funds - JANA Partners and S.A.C Capital Advisors (the hedge funds) - who together own 50 million shares of the company (representing 8.4% of the outstanding shares). In the letter, the hedge funds indicated their belief that AMTD shareholder value could be increased through a strategic combination within the industry. The hedge funds urged AMTD to set up a committee to oversee the pursuit of a combination with either E*Trade Financial or Charles Schwab. Both JANA and S.A.C. are currently seeking regulatory approval to acquire over $600 million more shares of AMTD.

The hedge funds also highlighted their belief that TD Bank, as the largest shareholder in TD AMTD (with a 40% stake), has been actively impeding the company's ability to pursue these opportunities due to conflicts of interest between the bank and the remaining shareholders of AMTD. The hedge funds indicated that TD Bank should allow AMTD to pursue these strategic combinations or make a bid for the remaining equity in the company.

Ameritrade's response to the letter stated it regularly reviews options within the industry. Furthermore, AMTD indicated that it is in favour of combinations, but 'at the right time and if it can reach agreement for the right strategic fit.' AMTD also indicated that it reviews the decision making process of the Board, in conjunction with its independent counsel, and always operates 'in good faith and in the best interest of shareholders.' AMTD also has a second large shareholder - the Ricketts family who own more than 20% of AMTD and have a shareholder agreement with TD. The exact position of the Ricketts family is somewhat unclear.

Yesterday, TD Ameritrade indicated that Fred Tomczyk will resign from the Board of Ameritrade to become the Chief Operating Officer of AMTD. To replace Mr Tomczyk on the Board, another TD designee, Thomas Mullins, was elected to the Board. This also occurred yesterday. It is hard not to view these moves as a sign that TD Bank is intent on moving at its own pace.

Having said that, this move by JANA and SAC clearly raises the pressure on TD Ameritrade to enter into a deal with either Charles Schwab or E*Trade. We agree with the hedge funds that the economic rationale for a union of any of these entities is good. In the largely stock-based acquisition of TD Waterhouse by Ameritrade, AMTD shares rallied roughly from US$12 to US$22. Clearly, the synergies from a merger of two online brokers ensure that deals are compelling for both acquirer and target.

There are, however, some realities. AMTD has only completed the system conversion of the Waterhouse accounts to the Ameritrade platform three weeks ago. This is a complex process fraught with risk. If there are problems with customer accounts during a conversion, there is real potential for negative impact on the franchise. Furthermore, it takes 'two to tango' and so far neither Schwab nor E*Trade have offered to do a deal with AMTD.

We are confident that TD's stake in AMTD is worth well above the US$20 level in a merger scenario - in virtually any merger scenario. Cost savings in historical transactions are very large relative to operating earnings. We believe that an all-stock merger of AMTD and E*Trade has the potential to be additive to AMTD forecast earnings by over 30%. This could add up to US$8 to the value of AMTD.

Having said that, TD Bank as a bona fide shareholder, has a right to vote for or against any potential transaction. We do not believe that it has any responsibilities to maximize share price in the short term. Given its 39.9% voting power, it will have a material say in what transpires at AMTD. One issue that we believe would be meaningful for TD Bank is that it would not want to have a small stake in a bigger brokerage, if it did not have material say in the running of the broker. We are raising our target price to $78 from $76. There are 0.35 shares of AMTD for every TD Bank share. A US$8 move in AMTD share price adds $3 to value for TD. We are reluctant to add this total amount to our TD Bank target price because of the risks that TD cannot find a deal that is acceptable to it.

We continue to recommend TD shares. Having said that, it is possible that various parties were purchasers of TD shares in anticipation of these developments. TD shares trade at a minor premium P/E (12.6x 2008 forecasts) relative to the bank group, despite the fact that it has one of the leading retail banking franchises in Canada, and two avenues for growth in the U.S. While TD clearly wants to grow these two franchises, both of these assets have values that are well over 12.6x forecast earnings.
Dow Jones Newswires, Gaston F. Ceron, 5 June 2007

Two hedge funds that own stakes in TD Ameritrade Holding Corp. are pushing the online-brokerage firm to seek a large merger, saying that Ameritrade could boost shareholder value by joining forces with either E*Trade Financial Corp. or Charles Schwab Corp..

Such a deal would deliver large expense and revenue benefits, the funds, managed by Jana Partners and S.A.C. Capital Advisors, said in a letter sent last week to Ameritrade's board. The call for an Ameritrade merger comes at a time when the online-brokerage industry faces questions about growth and its exposure to the swings of the market.

The two funds own a combined 8.4% stake in Ameritrade and are seeking to substantially increase their position. The news came out after the end of Tuesday's regular-trading session; Ameritrade shares were recently up 9.6% in after-hours trading.

Jana and S.A.C. told Ameritrade, which is based in Omaha, Neb., that the Ameritrade board should set up a special committee "to oversee the immediate pursuit of a strategic combination."

Such a panel should be free of interference by directors selected by Canada's Toronto-Dominion Bank, which owns a big stake in Ameritrade and which S.A.C. and Jana criticized as a hurdle to an Ameritrade deal. The two hedge funds said Ed Clark, TD's chief executive and an Ameritrade director, has said the board "is unanimous in its opposition to a combination with E*Trade," but that Jana and S.A.C., taking into account the benefits of such a deal, "can only conclude that Toronto-Dominion's self-serving strategic views have distorted the board's analysis."

"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 favorable accounting treatment, and the best interests of the majority of shareholders, who seek maximum value for their shares," the two hedge funds said in their letter. The funds said TD also has the option to buy out other investors "for full and fair value."

Toronto-Dominion spokesman Neil Parmenter said the bank disagrees with the funds as far as TD's role in Ameritrade. "TD cannot block a transaction," he said. "There's 12 board seats - we only have five." TD has a stake of about 40% in Ameritrade; other important shareholders include the chairman and founder of Ameritrade, J. Joe Ricketts, and his family, which hold about 21%.

A spokeswoman for E*Trade, Connie Dotson, declined to comment. In the past, the New York-based company has said it's interested in deal-making. But a Schwab spokesman, Greg Gable, dismissed the notion of buying Ameritrade. "As we have said before, we don't see any significant strategic advantage that such an acquisition would provide, either in terms of new capabilities or long-term growth," said the spokesman for San Francisco-based Schwab.

Ameritrade said in a regulatory filing that Jana and S.A.C. have sought regulatory approval to acquire additional shares in excess of $600 million. Ameritrade said it "has a long history of growing through successful acquisitions and organic growth." The company said it's interested in doing deals "at the right time and if it can reach agreement for the right strategic fit."

Katrina Becker, a spokeswoman for Ameritrade, said the company's directors and managers "are committed to creating long-term value for all shareholders." She added: "We have been and will continue on a course that demonstrates that commitment." Ameritrade said its board regularly reviews its strategy in consultation with its financial advisor, Merrill Lynch & Co.

"TD Ameritrade has had and expects to continue to have discussions with its peers in the industry regarding mergers and acquisitions and believes that to be successful they must occur at the right time and be consistent with TD Ameritrade's business strategy," the company said. Ameritrade said it has a standing mergers and acquisitions committee, staffed by three outside independent directors, one director chosen by TD and one chosen by the Ricketts.

Earlier, Ameritrade shares slipped 7 cents, or 0.3%, to close the regular session at $19.95 amid a general market drop. In after-hours action, the shares were recently changing hands at $21.86.

The online-brokerage business has seen a number of mergers in recent years, as firms sought the savings and scale that could be reaped by joining forces. Ameritrade and E*Trade have done their share of deals - Ameritrade acquired TD Waterhouse in January 2006, while E*Trade bought BrownCo and Harrisdirect in 2005.

But many of the smaller firms that could be easily swallowed up now are gone and that has some on Wall Street hoping for a bigger deal, this time between Ameritrade and E*Trade. Some analysts have made the case for the merits of such a combination. David Trone, of Fox-Pitt Kelton, said in a report in April that the two firms face problems such as continued pressure on trading fees - an important revenue source - no growth in recreational stock trading and their lack of significant success in luring more-stable buy-and-hold investors as customers.

In their letter, Jana and S.A.C. said "synergies" form a merger with E*Trade could yield as much as $500 million in annual cost savings, from moves such as combining assets on one platform, and more than $100 million in yearly revenue benefits.

However, one potentially stumbling block to an Ameritrade-E*Trade combination could be the fact that the two firms are led by strong-willed management teams used to running the show. It remains to be seen how the pressure from the two hedge funds will affect the situation.

"TD does to some extent seem to have the public Ameritrade shareholders captive," said Trone, the Fox-Pitt analyst. An E*Trade-Ameritrade deal "should happen because it's so likely to create shareholder value through huge cost synergies," Trone said. "With activism, the probability obviously increases," but "it takes two to tango."

Separately, Ameritrade named Fred Tomczyk, a TD official who has been sitting on Ameritrade's board, to the vacant position of chief operating officer. Tomczyk will leave TD to join Ameritrade in July, Ameritrade said, and also has resigned as an Ameritrade director. He is being replaced as an Ameritrade director by Thomas Mullin, general counsel of Constellation Brands Inc., as a TD representative on the board.
Bloomberg, Bradley Keoun, 5 June 2007

TD Ameritrade Holding Corp., the third-largest online brokerage, should consider a combination with E*Trade Financial Corp. or Charles Schwab Corp., said hedge funds Jana Partners LLC and SAC Capital Advisors LLC.

A merger would ``dramatically increase long-term shareholder value,'' the two funds wrote in a May 29 letter to the board of directors of Omaha, Nebraska-based TD Ameritrade. They also said Toronto-Dominion Bank, the company's largest shareholder with a 40 percent stake, is ``standing in the way'' of a merger. The funds said they represent about 8.4 percent of TD Ameritrade's outstanding shares.

Combining with Schwab or E*Trade would produce ``cost and revenue synergies, strategic benefits and the opportunity to take advantage of industry dynamics favoring consolidation,'' Jana Managing Partner Barry Rosenstein and SAC Chief Executive Officer Steven A. Cohen said in the letter. The benefit with E*Trade may be as much as $600 million a year, they wrote, or $1 billion over the ``medium-term'' with Schwab.

Shares of TD Ameritrade surged in April and May on speculation it might combine with San Francisco-based Schwab, the biggest online brokerage, or New York-based E*Trade, the fourth- largest. Analysts including Matt Snowling of Friedman, Billings, Ramsey Group Inc. have said the industry is ripe for consolidation and any cost savings would speed earnings growth.

TD Ameritrade responded in a securities filing today that it has ``publicly stated that it is interested in growing via combination, at the right time and if it can reach agreement for the right strategic fit.''

The company's board of directors and its financial adviser, Merrill Lynch & Co., ``regularly review whether possible mergers and acquisitions could augment this strategy to create greater value,'' TD Ameritrade said in the filing. The company has done nine merger and acquisition transactions since 2002, spokeswoman Katrina Becker said in an interview.

TD Ameritrade was created in January 2006 when the former Ameritrade Holding Corp. bought Toronto-Dominion Bank's network of independent advisers, TD Waterhouse. In exchange, the Toronto- based bank received 196.3 million TD Ameritrade shares.

Toronto-Dominion's representatives on the board have ``untenable conflicts of interest'' because the Canadian bank views its stake in TD Ameritrade as ``critical to its U.S. strategy and necessary to maintain favorable accounting treatment,'' the letter said.

Toronto-Dominion disagrees with the funds' assertions, spokesman Neil Parmenter said. The bank supports industry consolidation, he said, declining to comment on deals with specific companies.

``Everyone on TD Ameritrade's board acts in the best interests of all their shareholders,'' Parmenter said. ``TD Bank directors are a part of that, they're certainly a part of the board, but we don't have control of the board. There's 12 seats on the board and TD has five of those.''

Separately, TD Ameritrade today named Fred Tomczyk chief operating officer to replace Randy MacDonald. Tomczyk was vice chairman of corporate operations for TD Bank Financial Group and a member of TD Ameritrade's board of directors, said a company statement.

Schwab CEO and founder Charles Schwab said last month a combination of his two smaller rivals would be ``a healthy thing for the industry.'' Spokesman Greg Gable said today Schwab isn't interested in buying TD Ameritrade.

``We don't see any strategic advantage that such an acquisition would provide, either in terms of new capabilities or long-term growth,'' Gable said.

E*Trade spokeswoman Pam Erickson said, ``We don't comment on the acts of competitors.'' Jonathan Gasthalter, a spokesman for Cohen, declined to comment, and Rosenstein didn't return a call.

``To get more scale in this business is important,'' said Peter Goldman, who helps manage $600 million at Chicago Asset Management. ``There's a tremendous fixed-cost base, so a merger always brings cost savings.''

Revenue gains, though, ``aren't a sure thing,'' and TD Ameritrade still hasn't completed integrating computer systems it acquired, said Goldman, who follows the discount brokers and doesn't currently own shares.

The stock of TD Ameritrade fell 67.5 cents to $19.9525 at 4:30 p.m. New York time in Nasdaq Stock Market trading before the letter was disclosed. In late trading, the shares rose as high as $21.45.

TD Ameritrade's shares have gained 23 percent this year, second-best in the 12-member Amex Securities Broker/Dealer Index. The only stock that did better was A.G. Edwards Inc. -- which agreed May 31 to be acquired by Wachovia Corp.