On Thursday, Charles Schwab Corporation (SCHW) announced that it has completed the acquisition of optionsXpress Holdings, Inc, a retail online brokerage company focusing mainly on equity options and future acquisitions. The all-stock acquisition deal was valued at $1.0 billion.
Low interest rates and declining volumes have restricted Schwab’s growth momentum for the past two years. We think the addition of optionsXpress will be favorable for enhancing Schwab’s equities-focused business. Now, Schwab will be able to introduce the options and futures capabilities of optionsXpress to its clients.
As of June 30, 2011, Schwab has served more than 10 million individuals, independent advisor client and retirement plan participant accounts. The acquisition will now bring optionsXpress’ 397,400 client accounts under Schwab’s umbrella.
Per the contract terms announced on March 22, 2011, Charles Schwab has given 1.02 shares for each share of optionsXpress. The deal was valued at $17.91 per share or 17% premium to the closing price of optionsXpress’ stock on March 18.
Mr. David Fisher, CEO of optionsXpress, will continue as its president. Post merger, he has also become senior vice-president at Charles Schwab.
Charles Schwab anticipates the deal to be modestly accretive to its earnings. It is expected to provide synergies of about $80 million ($60 million from revenue and $20 million in cost savings) in the first full year of combined operations.
This coming together will provide opportunities to Charles Schwab’s client investors presently using options and derivative strategies as part of their investment tool. Further, the clients will also gain access to optionsXpress’ leading edge trading and analytical technologies.
Additionally, optionsXpress’ clients will find brokerage, investing and banking services at Charles Schwab complementary to those they are using at present.
Further, the deal would also help Charles Schwab’s registered investment adviser (RIA) business wherein many brokers send clients' trading business to Charles Schwab, in exclusive arrangements. Moreover, many of these RIAs seek sophisticated and innovative products that can be recommended to their clients.
This deal is similar to that of the Charles Schwab’s peer TD AMERITRADE Holding Corporation’s (AMTD) acquisition of option brokerage Thinkorswim Group in 2009.
Currently, Charles Schwab retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, considering the fundamentals, we are maintaining a long-term “Neutral” recommendation on the stock.
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