Charles Schwab & Co., the leading online brokerage, said today that it will take a leap into the coveted area of managing money for the wealthy by purchasing U.S. Trust Corp., which invests for some of the country's richest people.
The $2.7 billion stock purchase would be among the first under revised banking laws that allow brokerages and banks into each other's turf. It will give Schwab leverage in the high-stakes competition among financial companies to keep customers paying for the services of financial advisers and attract the wealthiest clients.
"Schwab has been facing an important strategic challenge of how to keep wealthy and older customers," said Judah Kraushaar, a financial industry analyst at Merrill Lynch & Co. "They were missing certain products in the trust area and suffering a lot of attrition. This is a way to shore up the better customers from leaving the company."
U.S. Trust, founded just before the Civil War, manages about $86 billion in assets, ranging from $250,000 to the millions. It handles a variety of services, including money management, trusts and taxes. Among its customers is Charles Schwab, who founded his more plain-vanilla investment firm 29 years ago, and his co-chief executive David Pottruck.
Schwab will pay 3.427 shares for each share of U.S. Trust. That makes U.S. Trust shares worth about $138 each--75 percent more than yesterday's closing price. The companies will continue to operate separately. U.S. Trust chief executive H. Marshall Schwarz and President Jeffrey Maurer will retain their titles and join Schwab's board. Pottruck will join the board of U.S. Trust.
With the U.S. Trust acquisition, Schwab will manage about $800 billion in assets, with 10 percent of its customers holding accounts worth more than $1 million. Currently, only about 5 percent of its customers have accounts larger than $1 million. In recent years, it has built a massive Internet presence, gradually moving clients away from its physical locations.
"They've been high-tech," said Fred Taylor, chief investment officer at U.S. Trust. "We've been high-touch."
U.S. Trust said today it earned $20.2 million in the fourth quarter. In 1999, the combined companies would have had net revenue of $4.5 billion, net income of $663 million, and year-end customer assets of about $800 billion.
U.S. Trust shares surged 69 percent today, rising $54.12 1/3 to $133.
This is Schwab's biggest acquisition ever--and the first major purchase by a brokerage of a bank under the landmark financial services legislation signed into law last year that relaxed barriers designed to separate banks, brokerages and insurance companies. Previously, Schwab--which for a brief, unhappy period was a unit of Bank of America--could not have become a financial holding company.
"This is the first of a wave focusing on large financial institutions looking to grow in other directions," said Amy Butte, an analyst at Bear, Stearns & Co. "We expected the first wave of mergers due to financial monetization bill would focus on the trust and high net worth arena. This is the area everybody wants to be in."
Other examples of companies likely shopping around, she said, are Legg Mason Inc. of Baltimore, Neuberger Berman Management Inc. and Northern Trust Corp.
U.S. Trust, she said, is the "crown jewel" of its field. "Together, you have the creme de la creme of financial technology and the trust business," Butte said.
CAPTION: Charles R. Schwab, right, founder of the online brokerage that bears his name, and U.S. Trust's H. Marshall Schwarz in New York yesterday.