Charles Schwab Corp.(SCHW) announced an all-stock deal to acquire optionsXpress Holdings Inc. (OXPS) for $1.0 billion. Incorporated in 2001, optionsXpress is a retail online brokerage company mainly focused on equity options and futures.
For the past two years, as a result of low interest rates and declining trading volumes Charles Schwab has been struggling to retain its growth momentum. So the deal will enhance its equities-focused business by expanding into lucrative derivatives trading.
Terms
Under the agreement, Charles Schwab will give 1.02 shares for each share of optionsXpress. Hence, Charles Schwab will issue 60 million shares as per the transaction. The deal is valued at $17.91 per share or 17% premium to the closing price of optionsXpress’ stock as of March 18.
Mr. David Fisher, CEO of optionsXpress, will continue as its president and will become senior vice-president in Charles Schwab. Additionally for the time being, both the companies will retain their brand names.
Certain shareholders (about 22.9%) of optionsXpress have signed a voting accord with Charles Schwab confirming to vote in favor of the transaction. The agreement (already approved by the boards of directors of both the companies) is still subject to regulatory approvals and consent from shareholders of optionXpress and is expected to close in the third quarter of 2011.
The transaction also has termination fees of $41.9 million. Further, CFO of Charles Schwab noted that the company has sufficient capital resources and will not require to raise any capital to complete the transaction.
Benefits
Charles Schwab anticipates that the deal with optionsXpress will be modestly accretive for the company. The company expects synergies of about $80 million ($60 million from revenue and $20 million in cost savings) in the first full year of combined operations.
As of February end, optionsXpress had 385,200 client accounts and $8.1 billion in client assets. This will enable Charles Schwab to diversify its online cash equity platform to faster growing futures trading and foreign exchange areas.
The combination of both the companies will provide opportunities to those Charles Schwab’s client investors who are presently using options and derivative strategies as part of their investment tool. Further, the client investors will also be able to utilize optionsXpress’ leading edge trading and analytical technologies.
Additionally, optionsXpress’ clients will find the brokerage, investing, and banking services at Charles Schwab complimentary to those they have been 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 they can recommend 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.
Our Viewpoint
Following the completion of Charles Schwab’s acquisition of optionsXpress, the company’s financials will benefit in the longer term. The company generates revenues from asset management and banking services. Although lower trading activity and volatile interest rates remain the near-term concerns, the company’s top line will benefit from increased trading in derivatives as a result of this acquisition.
Currently, both Charles Schwab and optionsXpress retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we are maintaining a long-term Neutral recommendation on Charles Schwab’s stock.
TD AMERITRADE (AMTD): Free Stock Analysis Report
OPTIONSXPRESS (OXPS): Free Stock Analysis Report
SCHWAB(CHAS) (SCHW): Free Stock Analysis Report
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