The proposal would have given Ameritrade shareholders 47.5 percent fully diluted ownership of the combined E-Trade Financial/Ameritrade entity plus approximately $1.5 billion in cash.
E-Trade expected "synergies," which usually translate to layoffs of those with duplicate job responsibilities, of at least $650 million.
The proposal also included joint participation in senior management roles and representation on the board of the combined entity.
According to E-Trade, the combined companies would compose the largest online brokerage, with more than 7 million customers generating about 300,000 trades per day.
Total client assets would be $170 billion, with total client borrowing relationships in excess of $19 billion.
Pre-tax margins for the combined company would replace Ameritrade as leading the industry.
Ameritrade has been on the buying side of acquisitions in the online brokerage space, buying Datek in 2002, and acquiring smaller rivals Bidwell & Co., Brokerage America, JB Oxford & Co. and Investex during 2004.
More recently, Ameritrade was said to be near completion of a deal that would result in a takeover of TD Waterhouse.
"With seven M&A transactions in the past four years, Ameritrade is a leader in consolidating this industry. We will continue to explore strategic opportunities, basing our decisions on whether a transaction will enhance shareholder value and benefit our clients," said Joe Moglia, chief executive officer, in a statement.
E-Trade has also been named as a potential acquirer of TD Waterhouse, but the deal reportedly broke down during 2004 discussions over matters of control of the merged entity.
"The board believes there will likely be further consolidation in the industry, but confirmed Ameritrade is not for sale. We are confident in our management team and its strategy," said Joe Ricketts, founder and chairman, in a statement.
The rumors drove the stock price of both firms up.
"The investment community has clearly stated a need for consolidation in this industry," said E-Trades CEO Mitchell H. Caplan.
"The markets initial reaction validates its acceptance of the proposal we have put forth."