On January 8, 2009, TD Ameritrade (Nasdaq:AMTD) announced it was acquiring Thinkorswim Group (Nasdaq:SWIM) for $3.34 per share in cash along with 0.3980 in TD Ameritrade shares, valuing the deal at $606 million as of January 7, 2009. The question now for Thinkorswim investors - should they stay or go?

Steady As She Goes
Thinkorswim's latest 12-month results, ended September 30, 2008, show the company is doing well and growing quickly. With revenues of $380 million and pre-tax income of $87 million, TD Ameritrade is getting a winner that leads the brokerage industry in retail options trades on a daily basis. The combination should make it a formidable force in stock trading. Ameritrade expects Thinkorswim will increase earnings by 10-15% approximately 12 months after completing the integration. (Companies use M&A's and spinoffs to boost profits - learn how you can do the same, check out Cashing In On Corporate Restructuring.)

Transforming Powers
Thinkorswim is an online brokerage that caters to options traders while Investools delivers investor education, giving the company the perfect one-two punch. By finding and educating investors, it provides its brokerage division with an ongoing supply of active traders, resulting in increased commission revenues. To achieve this business model, Investools bought Thinkorswim for $360 million in February 2007, taking a barely profitable educational business and integrating the two operations; transforming it into a Barron's favorite overnight.

An Even Stronger Business
Revenues for TD Ameritrade in fiscal 2008 increased $2.54 billion (17%) from $2.18 billion and pre-tax income was up $1.26 billion (22%) from $1.03 billion the year before. Adding Thinkorswim's numbers to the end of September and you have a company with revenues of $2.92 billion and pre-tax income of $1.11 billion. Which is excellent in such a terrible market.
On January 8, Friedman Billings initiated coverage of TD Ameritrade with a "market perform" rating. In this market, that's a compliment. Further, In June 2005, TD Bank exchanged its shares in TD Waterhouse for a 32% stake in Ameritrade, which was renamed TD Ameritrade. As of January 9, 2009 TD owns 40.3% of TD Ameritrade, a comforting feeling when you consider that the Canadian banking industry is one of the best in the world.

What Does the Future Hold
While TD Ameritrade has held up reasonably well in 2008, the question according to Eugene Bukoveczky is whether it can do the same in 2009? His conclusion: online brokers aren't likely to see a meaningful recovery until 2010. He reasons that firms like Charles Schwab (Nasdaq:SCHW), E-Trade (Nasdaq:ETFC) and even TD Ameritrade will experience serious declines in their daily trading volume, perhaps as high as 35%. Nonetheless, TD Ameritrade CEO Fred Tomczyk sees fiscal 2009 earnings per share (EPS) of $1.10-1.42, a sign that it's not exactly sure what will happen in the coming months. What it does know is that its active trading revenue should increase by 5% to 11% annually for several years with the Thinkorswim acquisition helping this along.

Bottom Line
The most disconcerting part of this story is the 2008 compensation of its CEO, who made a combined $35.2 million. They've done a good job, but with so many people unemployed, this sends the wrong message. Despite this faux pas, Thinkorswim investors should hang on to their TD Ameritrade stock because there seems to be plenty of upside.

Learn how to invest in companies before, during and after they join together in The Merger - What To Do When Companies Converge.