Ameritrade said Wednesday it will acquire TD Waterhouse, ending months of negotiations between the two online brokers and sending shares of Ameritrade up 20.6 percent.

The combined entity will be called TD Ameritrade, and will be headed up by Joe Moglia, the CEO of Ameritrade, who estimated the value of the deal at $2.9 billion.

Toronto Dominion Bank Financial Group, parent of TD Waterhouse, will receive 32 percent ownership of TD Ameritrade for the U.S. brokerage business, and will acquire Ameritrade’s Canadian brokerage operations for $60 million in cash.

The shareholders of Ameritrade will get a $6 cash dividend per share. Ameritrade shares closed up $3.05 at $17.87 on that news, and rose another $0.23 in after-hours trading. More than 85 million shares traded hands on Wednesday, about 13 times the average daily volume of 6.6 million.

Toronto-Dominion shares rose $0.54 to $44.15. Shares of E-Trade, which has been hoping to acquire Ameritrade, climbed $0.84 at $13.75.

Following the closing, TD Bank Financial Group will put in a tender offer for an additional 7.9 percent of outstanding shares at $16 per share. Ameritrade Chairman J. Joe Ricketts, who founded the Omaha, Nebraska-based company, may also participate in the tender offer.

Robert Hansen, an analyst with Standard & Poor’s, said the deal made sense strategically for Ameritrade, as it would increase its market share among active traders. The acquisition also gives it access to TD Bank, which would help it diversify. At this point, the company is largely dependent on trading revenue.

"The acquisition of TD Waterhouse U.S.A. is the right deal for Ameritrade," said Mr. Moglia. "We expect that it will create significant value for shareholders by generating substantial cost synergies and deliver a more diverse revenue mix by shifting to an asset-gathering model.”

Ameritrade said that if the two companies had operated as a single body for the past year, it would have posted annual revenue of more than $1.8 billion and annual net income of $557 million or $0.92 per diluted share. In fiscal 2004, Ameritrade had net income of $272.3 million on revenue of $880 million.

Past Mergers

Ameritrade has a reputation for successfully integrating acquisitions. It has bought seven companies in the past four years. But analysts are concerned about this one as it is Ameritrade’s biggest acquisition to date. Furthermore, Ameritrade has said that it will use borrowings in part to pay the $6 dividend to its shareholders.

The announcement followed a bid Tuesday night from E-Trade for Ameritrade at $17.50 per share, including $2.3 billion in cash and 49.5 percent of the stock of the combined company, according to CNBC.

Competition in the online trading business has driven firms like Ameritrade and E-Trade to undercut each other’s commissions. Commissions are expected to remain low or go even lower despite the current merger.

“The recent consolidation is motivated by a downturn in trading activity as well as increasing price competition, notably from Schwab, which had three price cuts in the past year,” said Mr. Hansen.