Charles Schwab Corporation
) has announced its decision to acquire optionsXpress (
) in a friendly all-stock deal. This deal will help Charles Schwab
compete with other firms like E-Trade (
), Ameritrade (
), Fidelity and Bank of America (
), which all have large online brokerage services and are vying to
provide investors with the best tools and services.
The deal which is expected to close by the third quarter of
2011, will cost Schwab $1 billion, and the company will issue 60
million new shares to swap each outstanding share of optionsXpress
with 1.02 of its own share.
Our $19.74 price estimate for Charles Schwab
is at a premium of almost 12% to its current market value.
The Growing Popularity of Options
Retail investors with a higher risk appetite look at options as
a simple yet effective way to speculate on certain securities or
hedge existing positions. Options trading has become
an indispensable tool for many investors and are increasing in
popularity and so online brokerages want to retain these customers
by offering them the ability to trade options as part of their
Recently, in our article titled
Increased Options Trading to Lift Ameritrade? Not
, we had tried to understand the impact of options trading on the
value of Ameritrade - one of Schwab's oldest rivals in the
industry. Ameritrade recognized the potential benefits from options
trading much earlier than some of its peers as witnessed by its
acquisition of thinkorswim in 2009.
So What is the Deal all About?
The acquisition will give Schwab access to the 379,000 client
accounts and $7.9 billion in client assets which optionsXpress
reported in 2010. This would add to Schwab's existing 8 million
active client accounts and more than $1.6 trillion in assets. The
deal was reportedly negotiated behind closed doors for quite some
time and will now need the requisite approval of regulators as well
as optionsXpress shareholders.
The announcement of the deal resulted in a 15% increase in
optionsXpress's stock price while Schwab's shares barely budged. So
is the implied message here that the deal is not going to add much
value to Schwab actually true? We will look at this in a
See our full estimates for Charles Schwab.