Schwab hops optionsXpress in $1 billion stock deal

NEW YORK Mon Mar 21, 2011 5:14pm EDT

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NEW YORK (Reuters) - Charles Schwab Corp (SCHW.N) will buy U.S. online brokerage optionsXpress Holdings Inc OXPS.O in a $1 billion deal that gives Schwab a stable of the most active retail traders, as options continue to boom.

The friendly all-stock takeover, announced Monday, is a nod to the increased use of options contracts as a way to speculate and hedge -- a far more complicated and capital-intensive strategy for individuals than plain vanilla stock-trading.

The deal returns Schwab to the acquisition game after a quiet decade, and could help the big U.S. brokerage hang on to the most sophisticated of its online trading clients.

"It really just lets us jump the curve a little bit in terms of helping these highly valuable clients," Schwab Chief Executive Walt Bettinger said on a conference call with analysts and media.

The acquisition values optionsXpress at $17.91 per share, a 17 percent premium to its $15.33 closing price on Friday. OptionsXpress shares jumped 15.3 percent on Monday, while Schwab shares were mostly flat.

U.S. options trading volume has grown strongly in recent years, part of the reason Schwab's chief rival, TD Ameritrade Holding Corp (AMTD.O), bought options specialist thinkorswim in 2009.

Ten-year-old optionsXpress also gives Schwab a leg up in fast-growing foreign exchange and futures trading, diversifying its online platform that now relies heavily on cash equities.

"Mainstream investors are expanding their view of asset classes, and the Schwab deal is a reflection of that," said Alois Pirker, director of research at Aite Group, a research firm specializing in brokerages and securities markets.

The prevalence of Web-based brokers, their investor education drives, as well as a move to electronic markets, have all helped ramp up trading in options -- which give contract holders the right to buy or sell an underlying security over an agreed time, or at a set date.

"They've created this new class of people and armed them with the right tools, so it is definitely much easier and much faster to become a higher-end, sophisticated retail options trader than it was five years ago," said Mark Longo, CEO of theoptionsinsider.com, an options information Web site.

Options traders have three times the assets and do six times the trades, compared to other clients, Schwab said. So far this year, average daily U.S. options volume has jumped 21 percent from last year's record, according to the OCC.

TERMS

Under the terms of the deal, which is expected to close in the third quarter, each share of Chicago-based optionsXpress would be swapped for 1.02 shares of Schwab. Schwab, also an asset manager, will issue 60 million shares in the agreement.

OptionsXpress had 379,000 client accounts and $7.9 billion in client assets at the end of last year; Schwab had nearly 8 million accounts and $1.6 trillion in assets.

Together, the pair logged 315,000 daily average revenue trades (DARTS) in the last quarter of 2010 -- still below TD Ameritrade's industry-best 372,000.

About 10 percent of Schwab's DARTS are now from options, the broker said in a presentation, adding the 6,000 registered investment advisers (RIAs) it services are increasingly using options "to manage risk and optimize income."

The San Francisco-based company expects to bring about $60 million in synergies from revenue and another $20 million from cost savings, boosting earnings "modestly" over the first full year of combined operations. It did not comment on job cuts.

TIMING

Schwab has been under pressure the last two years as retail trading calmed down and as U.S. interest rates remained near zero, damping its revenue from client assets. But the company's shares are up 27 percent in the last six months, as investors see turnarounds on both of those fronts.

"Schwab is trading at a rich multiple. There's a lot of expectations built into the stock," said Diego Perfumo, an analyst at Equity Research Desk. "Maybe they won't be able to deliver that growth organically, so they'd better go out and grow through acquisitions."

Perhaps helping to spur the deal, optionsXpress shares dropped nearly 25 percent before the open on December 28 after the company paid a special cash dividend of $4.50 per share. Stocks typically drop the day after payment of a dividend as the payout is no longer implied in the price.

David Fisher, CEO of optionsXpress, will continue to lead the division as its president. The online trading platforms of both optionsXpress and Schwab will be retained, and some trading commissions will drop, the companies said.

"This isn't a deal that's based primarily on ... cutting people and cutting expenses, it's much more on the opportunity we can bring to our combined customer base," Fisher said on the call. Talks began "months ago," he said, adding there was no outright auction process for optionsXpress.

The deal is Schwab's largest since its acquisition of U.S. Trust in 2000, and comes as the company ramps up its retail presence by opening U.S. branch offices staffed by independent brokers. The new offices, the first of which will open by year end, will supplement Schwab's existing 300 retail branches.

UBS AG (UBS.N) advised Schwab on the deal, while Evercore advised optionsXpress. It will need the approval of regulators as well as optionsXpress shareholders.

(Reporting by Jonathan Spicer; additional reporting by Joseph Giannone and Helen Kearney; Editing by John Wallace, Dave Zimmerman and Steve Orlofsky)

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