Charles Schwab announced Monday that it is purchasing fellow stock brokerage TD Ameritrade in a $26 billion deal. The acquisition represents a convergence of two longtime rivals founded by men who had a lot more in common than it might appear.
To be sure, the founders--neither of whom remains CEO--are very different people. Charles Schwab, the son of a lawyer, is a Stanford Business School graduate who got excited by investing at age 13. Joe Ricketts is a folksy guy who dropped out of college when his wife got pregnant and whose first job in finance was as a credit bureau reporter for Dun & Bradstreet. At the time, his other option was a higher-paid position selling frozen vegetables.
But the entrepreneurs shared a mission: to disrupt, from afar, the East Coast-based financial industry and to democratize trading for the benefit of smaller traders. (Charles Schwab is based in San Francisco; Ameritrade in Omaha, Nebraska.) And, coincidentally, they also share a similar publishing schedule. Schwab's Invested: Changing the Way Americans Invest came out in October. Ricketts's The Harder Your Work, the Luckier You Get: An Entrepreneur's Memoir was released earlier this month.
Here are just a few of parallels between Schwab's and Ricketts's entrepreneurial experiences, drawn from their recent books.
In the early 1970s, Schwab was publishing an investment newsletter and bemoaning the fact that the commission-driven structure of traditional stock trading worked against customers' interests. He wondered: Can I simply take the brokers out of the equation? "My big aha was when I realized I didn't have to sell at all. All I had to do was market the discount brokerage service and then provide the best possible customer service."
While conducting research into starting a brokerage, Ricketts visited a small company that served the over-the-counter market. "Clients could call you! You didn't have to call them! What fun! No more long days dialing for dollars! ....They weren't trying to make customers feel happy with the enthusiasm in their sales pitch. They were satisfying a practical need by executing orders quickly and accurately."
The importance of advertising
Schwab paid $1.50 for the rights to a photo of himself looking "happy, friendly, trustworthy" that ran in The San Francisco Examiner and incorporated it into a hugely successful ad that appeared for years in The Wall Street Journal. "It made us easy to spot: the Journal didn't print photographs with its news stories in those days, so the photo stood out. And my picture was a signal to the reader that we were a different kind of brokerage company."
Ricketts and his co-founders learned that even if they weren't members of the New York Stock Exchange, they could trade on it so long as they paid a higher price. After much arguing they decided to do so while still charging customers $25 per trade, and placed a small ad to that effect in the Journal. "The day it appeared the phone started ringing off the hook. Suddenly the orders were coming in as fast as our little band could keep up--in fact, faster."
Investing in technology
In 1979, Schwab spent half a million dollars--more than all the equity he held in his business--to bring technology in-house. It was the beginning of the technological framework that over the years would become a defining advantage of the firm. "That early experience gave us a comfort level with technology that hereafter set us apart. The lessons we learned positioned us ahead of the curve for decades to come and meant that when the internet exploded in the mid-1990s we were ready."
With the big brokerages preparing to launch proprietary-trading systems, in 1985 Ricketts began a rocky two-year process of adopting a cutting-edge computer system. "I was not going to be dependent on another company for something at the heart of our business. I wanted to be in control of our computing. ... If we declined the challenge and fell behind our competitors we risked getting left in the dust by an industry destined for fully computerized automation."
After a failed IPO, Schwab was in serious need of capital to fund growth. Bank of America acquired the company for $55 million in 1985. Not included in the price: use of Schwab's name and likeness. "The mere fact that BofA had pursued us would be seen as validation for me, my company, and the entire discount brokerage industry. It brought us instant credibility."
Following some nasty disagreements over strategy and management styles, in 1982 Ricketts bought out his two partners. "It was quite wonderful to work without any other decision-makers: to make choices on my own, to fail on my own, and to know that, win or lose, I would not have another company officer pointing a finger at me."
Schwab bought back the company in 1987 in a complicated transaction that required significant debt. The company's survival depended on healthy trading volume, which meant a healthy market. Less than a month later: Black Monday. "I'd worked too hard to convince people that investing could work for them, and I knew this crash would be temporary. I couldn't stomach the thought that millions of people might give up on investing."
Ameritrade was fresh off implementation of its new computer system when the crash happened, costing the business half a million dollars that first day. But the system, which was capable of handling a huge increase in trading volume, helped keep the company going. "The most painful result of the crash of '87 for us was the layoffs. Before the market declined so extremely the company had grown to more than 150 employees. Now I had to cut that number in half."
Enter the internet
Schwab's technology group was working to give service reps direct access to its network via a new thing called the World Wide Web, when they realized something: We could do this for customers, too. The internet scared traditional houses, and some in the industry equated online investing to giving clients a loaded gun. Schwab disagreed. "I also knew that the internet was going to be huge for the markets, huge for investors, and huge for Schwab. Better to go to market too early with the best we could come up with than too late with the best we could possibly do. Something like 85 percent ready is usually enough for me."
Ricketts instituted touch-tone phone trading, expecting its lower cost would make it popular. Customers placed orders at incredible speed, and he discovered they were developing software to automatically play the tones to send orders at a given price. What they wanted was more control. "From that point on I doubt there was anyone who believed in internet trading, or any new technology that increased the customer's power and freedom, as much as I did."