Schwab Unloads U.S. Trust: Cash for Another Deal?

In a move that has long been speculated about, Charles Schwab announced Monday that it had agreed to sell its private banking arm, U.S. Trust, to Bank of America for $3.3 billion. In a research report, Wachovia analysts said the deal will give Schwab a mountain of much-needed cash to play with: around $3.1 billion (excluding free cash flow from earnings) to be exact. Wachovia and other analysts speculated that the firm will put that dough towards share repurchases, investments in the institutional and investor-services business and, potentially, a small-sized acquisition.

In a move that has long been speculated about, Charles Schwab announced Monday that it had agreed to sell its private banking arm, U.S. Trust, to Bank of America for $3.3 billion. In a research report, Wachovia analysts said the deal will give Schwab a mountain of much-needed cash to play with: around $3.1 billion (excluding free cash flow from earnings) to be exact. Wachovia and other analysts speculated that the firm will put that dough towards share repurchases, investments in the institutional and investor-services business and, potentially, a small-sized acquisition.

It was unclear exactly what kind of acquisition analysts expect Schwab will make. “Schwab was unlikely to participate in industry consolidation until it either turned around U.S. Trust or sold the unit,” said a Friedman Billings Ramsey analyst report. “With the sale forthcoming in 2Q07, we believe the company to be much more open (with cash on hand) to make an acquisition—consistent with management comments of being open to any such transaction that improves efficiencies.”

U.S. Trust has struggled since Schwab acquired it for $2.7 billion in 2000—some clients and talent were alienated by the new management, and Schwab never found the synergies it had hoped for with its retail-brokerage business. Peter Scaturro, who became chief executive at U.S. Trust in 2003, has helped to turn the operation around in past couple of years, but analysts say it will probably do better with the kinds of resources that Bank of America has to offer.

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