Schwab to Acquire OptionsXpress for About $1 Billion, Adding Retail Broker

Charles Schwab Corp. (SCHW) agreed to buy OptionsXpress Holdings Inc. (OXPS) for about $1 billion in stock, adding the retail options brokerage founded in 2000 to its equity and mutual fund offerings.

Schwab, the largest independent broker by client assets, will exchange 1.02 shares for each share of Chicago-based OptionsXpress, according to a statement today. Based on San Francisco-based Schwab’s closing price on March 18, the transaction values OptionsXpress at $17.91 a share. The stock jumped 17 percent to $17.90 at 4 p.m. New York time, while Schwab rose 0.5 percent to $17.65.

Options trading in the U.S. has increased every year since 2002, rising 7.9 percent to 3.9 billion contracts in 2010, according to data compiled by OCC. Today’s acquisition follows TD Ameritrade Holding Corp. (AMTD)’s 2009 purchase of Thinkorswim Group Inc. for $748.7 million, aimed at diversifying the third-biggest U.S. online brokerage by assets by adding an equity derivatives unit.

“It’s a reaffirmation of the interest in derivatives and specifically options trading from the retail segment,” said Andy Nybo, a principal and head of derivatives at New York-based Tabb Group LLC. “As retail investors become more educated and sophisticated in their strategies, being able to use options and even futures to both manage risk and exposure is becoming a more valuable way of trading.”

Deal Valuation

Schwab agreed to pay 12.4 times earnings before interest, taxes, depreciation and amortization for OptionsXpress, more than the median multiple of 11 for deals larger than $1 billion in the investment banking and brokerage industry globally over the past 10 years, according to data compiled by Bloomberg. The acquisition price amounted to a premium of 20 percent more than OptionsXpress’ March 18 closing level, compared with the industry average of 8.8 percent, the data show.

At the end of February, OptionsXpress had 385,200 client accounts, $8.1 billion in assets and a 12-month average of 44,800 daily average revenue trades, according to the statement. Schwab’s client assets totaled $1.6 trillion.

“OptionsXpress’ industry-leading and award-winning client tools will be well received by our existing active investor clients who are increasingly using options and other trading strategies as a key part of their total approach to investing,” Schwab Chief Executive Officer Walt Bettinger said in the statement.

15 Takeovers

Schwab bought Windward Investment Management Inc. last year for $150 million, adding products such as gold and real-estate funds in its first acquisition since 2007. Schwab has completed at least 15 takeovers since 1999, according to data compiled by Bloomberg.

Shares of Schwab has gained 55 percent since the Standard & Poor’s 500 Index fell to a 12-year low in March 2009, trailing the 163 percent rally in the S&P 500 Financials Index. The stock fell the most since Aug. 11 on Feb. 3 after the company said 2011 expenses would rise faster than some analysts estimated.

The transaction, which has a termination fee of $41.9 million, is expected to close in the third quarter following regulatory approvals, Chief Financial Officer Joseph Martinetto said on a conference call today. Schwab doesn’t need to raise capital to pay for the deal, he said.

No Auction

OptionsXpress CEO David Fisher said merger discussions began several months ago. The combined company will save about $20 million in costs and boost revenue by $60 million during the first year together, Martinetto said.

“There was not an outright auction process. We viewed this as a unique opportunity,” Fisher said on the conference call with analysts today. “This isn’t a deal that’s based primarily on expense synergies and cutting people and cutting expenses. It’s built much more on the opportunity we can bring to our combined customer base.”

Fisher will continue to head OptionsXpress and become a senior vice president at Schwab after the transaction closes, according to today’s statement. The company will be part of Schwab Investor Services and initially keep its brand and locations.

UBS AG (UBSN) was the investment bank for Schwab, while Evercore Partners Inc. (EVR) advised OptionsXpress in the transaction, Bloomberg data show. Evercore, the investment bank founded by former U.S. Deputy Treasury Secretary Roger Altman, also helped advise AT&T Inc. on its $39 billion acquisition of T-Mobile USA, which was announced yesterday.

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Cecile Vannucci in New York at cvannucci1@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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