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Schwab to Acquire optionsXpress

The Charles Schwab Corp. (NYSE:SCHW) said today it will pay about $1 billion in stock for optionsXpress Holdings (NASDAQ-GS:OXPS), the retail online brokerage business, in a deal it expects to close in the third quarter. The deal will give Schwab, which has about $1.6 trillion in client assets, larger exposure in the fast-paced options industry.

Updated Tuesday.

Charles Schwab Corp.’s planned acquisition of optionsXpress Holdings, announced Monday, gives the retail brokerage giant a presence with a younger online investor crowd, one whose trading activities are growing at a strong pace, two industry analysts say.

“The client base is different. optionsXpress really does have a differentiated platform from the Charles Schwab platform,” says Michael Wong, an analyst who follows Schwab for Morningstar. “Type ‘options brokerage’ into Google, you’re more likely to come up with Thinkorswim or optionsXpress than you would Charles Schwab or TD Ameritrade (which bought Thinkorswim in 2009 for $606 million). If you were a twentysomething-year-old looking to become a day trader or do options trading, you’re much more likely to look into opening an account at optionsXpress or Thinkorswim than you were at Charles Schwab, which your parents or aunts or uncles use.”

Javier Paz, a senior analyst with Aite Group in Boston, says the typical optionsXpress client is 10 to 15 years younger than the average Schwab client. And online activity is growing at a faster pace than Schwab’s, Paz adds. Daily average retail trades at optionsXpress were 38,300 last month, up 37 percent year over year; Schwab’s DART stood at 478,000, up 21 percent. Paz says Schwab will keep the two brands distinct for the time being. “The two brands do appeal to two separate niches. It doesn’t really cost them anything to keep the brands separate at the moment.”

San Francisco-based Schwab said today it would pay about $1 billion in stock for optionsXpress Holdings of Chicago in a deal it expects to close in the third quarter. David Fisher, optionsXpress CEO, will continue to lead the company, and will also serve as a Schwab senior vice president. Schwab will provide 1.2 shares of its stock for each optionsXpress share.

Schwab has about $1.6 trillion in client assets. At the end of last month, optionsXpress had 385,200 client accounts, $8.1 billion in client assets and a 12-month average of 44,800 daily average revenue trades, the company reported. It was launched in 2001.

optionsXpress holdings include its broker/dealer, brokersXpress; Open E Cry, a futures brokerage; and Optionetics, an investment education service.

Schwab sees the deal as a way to boost trading revenue and client assets. There are 750,000 to 1 million U.S. investors trading at least 120 times a year, it says, and its growth is expected to reach double digits. Compared to its average Investor Services client, options traders at Schwab have three times the assets held at the company, two times the estimated assets held outside, and six times the trading activity. The deal will result in $80 million in cost savings in the first year of operation, Schwab said.

“Options investors at Schwab tend to be among the larger, more active and longer-standing of our client relationships,” Walt Bettinger, Schwab president and CEO, said in a statement this morning. “optionsXpress brings a similar set of sophisticated, engaged clients, many of whom we believe will find the investing, brokerage and banking services available through Schwab to be a valuable complement to those they have through optionsXpress. The expected synergies of our combination make the acquisition a win-win-win for Schwab, optionsXpress and our many important active investor clients.”

Tim Welsh of Nexus Strategy, a Larkspur, Calif.-based consultant, said just about 10 percent of financial advisors use options as an investing strategy. The fast-paced nature of the products doesn’t dovetail with most advisors’ buy-and-hold strategies for their clients. They prefer to rebalance quarterly, while options values are in flux because of their expiration dates. “An investment that has volatility in it typically does not land in an advisor portfolio. They don’t want to get sued,” Welsh says. “You have to monitor it and stay on top of it, because those things move fast.”

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