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Schwab Jumps Into Options

Stocks in this article: SCHW OXPS

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) - Charles Schwab (SCHW - Get Report) recently announced its decision to acquire optionsXpress (AMTD) in a friendly all-stock deal.

The deal is designed to help Charles Schwab compete with other firms like E-Trade (ETFC), Ameritrade (AMTD), Fidelity and Bank of America (BAC), which all have large online brokerage services and are vying to provide investors with the best tools and services.

The deal, which is expected to close by the third quarter of 2011, will cost Schwab $1 billion, and the company will issue 60 million shares, swapping each outstanding share of optionsXpress with 1.02 of its own share. Our $19.74 price estimate for Charles Schwab is at a premium of almost 12% to its current market value.

Retail investors with a higher risk appetite look at options as a simple yet effective way to speculate on certain securities or hedge existing positions. Options trading has become an indispensable tool for many investors and are increasing in popularity and so online brokerages want to retain these customers by offering them the ability to trade options as part of their service.

Recently, in a recent article , we discussed how Ameritrade , one of Schwab's oldest rivals, recognized the potential benefits from options trading much earlier than some of its peers as witnessed by its acquisition of thinkorswim in 2009.

Schwab's acquisition of optionsXpress will give Schwab access to the 379,000 client accounts and $7.9 billion in client assets which optionsXpress reported in 2010. This would add to Schwab's existing 8 million active client accounts and more than $1.6 trillion in assets. The deal was reportedly negotiated behind closed doors for quite some time and will now need the requisite approval of regulators as well as optionsXpress shareholders.

The announcement of the deal resulted in a 15% increase in optionsXpress's stock price while Schwab's shares barely budged. So is the implied message here that the deal is not going to add much value to Schwab actually true? We will look at this in a subsequent note. See our full estimates for Charles Schwab here .

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