Schwab's $1 Billion OptionsXpress Merger Shows The Industry How It's Done

Monday, March 21, 2011 21:26
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Schwab's $1 Billion OptionsXpress Merger Shows The Industry How It's Done

Tags: M&A | Schwab

Charles Schwab made headlines for paying a big premium for upstart options-oriented discount broker optionsXpress, but it's likely that this deal is at least partially aimed at wooing the advisory community.

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The deal won applause from investors as well as optionsXpress shareholders for valuing the company at a healthy 17% premium over Friday's close -- an obvious contrast to less successful recent merger bids in the industry.

 

OptionsXpress quickly surged to within a cent of Schwab's offering price, which reveals that the market thinks the deal will almost certainly go through. Only a somewhat low-profile call for disgruntled shareholders to join a possible class action suit has raised any clouds so far.

 

Richard Repetto at Sandler O'Neill was one of the first to weigh in on the deal as a positive for both partners -- in fact, he raised his rating on optionsXpress to "buy" even though there's a good chance the company's trading future is seriously limited now.

 

Schwab expects to earn $60 million in added revenue this year from the deal, probably in the form of a few extra trades a month in the options markets that optionsXpress has captured as its specialty. 

 

These relatively sophisticated instruments are also a good way to woo RIAs to the company's platform. TD Ameritrade already offers substantial options trading support, and as many advisors move toward ETFs over mutual funds, building an options position around each holding is becoming standard operating procedure.

 

The question is what kind of outreach to advisors we see. If the main thrust here is toward the self-directed retail investor, then RIAs may need to fend for themselves -- and their business was likely never the point of this merger to begin with.

 

On the other hand, if Schwab openly courts RIAs to deepen their options activities on behalf of their clients, the deal shows us where the firm sees the main chance for its future.

 

And of course, if Schwab just sweeps cash from optionsXpress accounts into its bank, that tells us that the recent options boom may simply be a passing fad -- or if it lasts, that Schwab is simply not interested.

 

Early days still, but a lot of moving parts still on the table.

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