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Ally Financial Foraying into Wealth Management Business?

Ally Financial Inc. ALLY is foraying into the wealth management operation by announcing a deal to acquire TradeKing Group, Inc. a digital wealth management firm. This will not only help the company to improve its product offering but will also be in sync with the recent trend of digitalizing financial operations.

The acquisition will cost Ally Financial $275 million and represents premium of nearly $250 million to the acquired net assets. Fort Lauderdale, FL-based TradeKing offers an online broker/dealer platform, educational content and social collaboration channels, and a digital portfolio management platform.

The transaction, expected to close in the third quarter 2016, is subject to regulatory consent from the Financial Industry Regulatory Authority (FINRA). Further, it is required to be compliant with the Hart-Scott-Rodino Antitrust Improvements Act and also satisfy other customary closing conditions.

Notably, in Feb 2016, Ally Financial had revealed its plan to expand into wealth management, mortgages and credit card operations.

Ally Financial’s CEO, Jeffrey Brown said, “The addition of wealth management is the next key step in Ally's digital product evolution and will create a powerful combination of segment-leading direct banking and innovative investment services in a single integrated customer experience. This transaction presents a compelling opportunity for customers and a logical growth opportunity for Ally.”

TradeKing has roughly $4.5 billion in client assets, including nearly $1.1 billion of cash and cash investments, 260,000 funded accounts and 20,000 daily average revenue trades (DARTs). Additionally, for 10 consecutive years, the company has received four stars in Barron's Online Broker Survey.

Following the closure of the deal, TradeKing’s management team and other 180 employees will join Ally Financial.

Ally Financial was advised by Goldman, Sachs & Co., a unit of The Goldman Sachs Group, Inc. GS, Jarrett Lilien and Sullivan & Cromwell LLP.  TradeKing was advised on the deal by Bank of America Merrill Lynch, division of Bank of America Corporation BAC, and Cooley LLP.

Financial Impact and Other Benefits

Ally Financial expects the transaction to a have minimal impact on 2016 and 2017 results and will be accretive in 2018. Further, the company anticipates future growth potential “as consumer preferences drive a greater shift toward digital wealth management services.”

Also, the deal will not affect Ally Financial’s plan to reward shareholders through dividends and share repurchases, which is subject to regulatory approval from the Fed. While the deal is not going to stop the company from redeeming Series A Preferred Stock outstanding worth approximately $700 million, it is deferring the redemption of trust preferred securities worth $500 million until further notice.

Ally Financial CEO further added, “This transaction positions Ally to further capitalize on emerging market trends, drive additional efficient deposit growth and diversify our revenue stream by adding fee-based income – all of which we believe will enhance shareholder value over time.”

As TradeKing faces intense competition from other online brokerage firms including TD Ameritrade Holding Corporation AMTD and The Charles Schwab Corporation SCHW, the deal will aid in catering to the clients’ banking needs. Further, operating in online space requires significant investments to develop advanced trading tools and techniques. So, the deal with Ally Financial will help TradeKing in this aspect as well.

Currently, Ally Financial carries a Zacks Rank #3 (Hold).

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