Online brokerages TD Ameritrade Holding Corp and E*Trade Financial Corp have been in serious merger discussions for weeks but are not close to a deal, the Wall Street Journal reported on Wednesday, citing people familiar with the matter.
Consolidation of the two giants into a dominant player could shake up the industry, which went through a wave of consolidation after the dot-com bubble burst, but analysts said such a deal was unlikely.
In morning trading on the Nasdaq, shares in E*Trade rose 1.3 percent, or 31 cents, to $15.78, while TD Ameritrade gained 42 cents, or 2.6 percent, to $16.77, losing ground from premarket trading as analysts and at least one publication said there was little new in the report.
The New York Times on its Dealbook web site reported on Wednesday morning that sources close to the companies had told it that no deal was imminent and that the barriers that had prevented a deal previously were still in place.
Analysts from UBS and Bank of America said they thought that the barriers to a deal actually being signed were high.
UBS wrote that the hurdles include E*Trade's credit and mortgage issues related to the mortgage market, different strategies, crowded boards and demanding shareholders, and controlling management teams.
Bank of America wrote that while a deal makes sense in terms of saving expenses, important issues such as who would run the company, how Ameritrade would continue to shift its strategy toward more fee revenue, and credit quality will ultimately prevent a deal.
Recent turbulence in credit markets has added to the issues the Journal said were under review, with E*Trade last week hit by concerns over the quality of its mortgage portfolio.
Shares of E*Trade fell as much as 28 percent last Thursday, but recovered on Friday after the company reassured investors about the credit quality of its mortgage holdings.
E*Trade declined to comment on the Journal report, but said in an interview that it views consolidation as an opportunity.
We do believe that consolidation provides tremendous opportunity: If there is an alignment in strategy and product we do see value, Mathias Helleu, managing director of E*Trade's international operations, told Reuters in Singapore.
A TD Ameritrade spokeswoman said the company has talked and continues to talk to industry peers, and would take advantage of a deal if and when it made sense. Toronto Dominion, which owns a large stake in the company, declined to comment.
As of the end of June, E*Trade counted 4.7 million brokerage and banking accounts, compared with 6.3 million such accounts at TD Ameritrade, and 6.9 million at the Charles Schwab Corp, the Journal reported. In contrast, Merrill Lynch & Co has more than 7 million customer accounts.
The most recent round of talks -- with both companies having discussed joining together several times in past years -- come as two hedge funds with big stakes in TD Ameritrade publicly called on the two companies to talk.
The two funds, Jana Partners LLC and SAC Capital, successfully pushed TD Ameritrade to drop its CEO from a committee considering merger and acquisition opportunities in favor of independent members.
Jana and SAC, which together own about 8.4 percent of TD Ameritrade, have consistently said merger discussions must be free of the influence of Toronto-Dominion Bank, which owns about 40 percent of the brokerage.
The value of a merger deal between E*Trade and TD Ameritrade, or how it would be structured, were not clear, according to the Journal.
However, one person familiar with the talks estimated a deal could value the combined company at as much as $20 billion, according to the newspaper, taking into account the possible savings from merging company accounts on to a single computer system.
Shares in Charles Schwab rose 1.8 percent, or 35 cents, to $19.61.
(Reporting by Lilla Zuill, Caroline Humer and Dan Wilchins in New York and Ovais Subhani in Singapore)