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Schwab acquires U.S. Trust
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January 13, 2000: 3:57 p.m. ET
$2.7B deal gives financial services company access to wealthy clients
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NEW YORK (CNNfn) - Charles Schwab Corp. agreed Thursday to acquire U.S. Trust, one of the nation's leading wealth management firms, for $2.7 billion in stock, accelerating Schwab's transition from a discount broker to a full-service advisory firm.
The deal, which the companies hope to close by July, would create a full-service brokerage firm boasting more than $4.5 billion in revenue and assets under management of roughly $800 billion.
More significantly, the agreement completes the gradual transition of Schwab, the nation's No. 1 Internet and discount broker and No. 4 financial services company overall, from a primarily hands-off brokerage into a full-service advisory firm able to cater to wealthy clientele and low-maintenance investors alike.
It also sends a stark wake-up call to key competitors such as Morgan Stanley Dean Witter and Merrill Lynch & Co., which have been trying to cut into Schwab's massive clientele base with several recent deals of their own.
"The great thing about this deal is everyone is constantly keeping up with Schwab," said Michael Freudenstein, an analyst with J.P. Morgan. "First it was supermarket funds, then it was online trading. Now, Schwab has taken what is going to be the next big battleground and gotten the best there is."
"U.S. Trust represents a piece of the puzzle that had been missing in our offering to affluent investors," said Charles Schwab, Schwab's chairman and co-CEO. "This has great appeal to the top 5 percent of [Schwab's] customer base."
Expanding its base
The agreement calls for Schwab (SCH) to exchange 3.427 shares of its stock for each share of U.S. Trust stock. Based on Schwab's closing price of 37-5/8 Wednesday, the transaction values each U.S. Trust share at $129.
Investors immediately followed Schwab's lead, boosting U.S. Trust (UTC) shares 46-5/8 to 125-1/2 in mid-afternoon trading, while Schwab, after falling initially, inched forward 3/8 to 37-3/8.
Analysts noted the San Francisco-based Schwab paid a high price for U.S. Trust, perhaps causing some investor concern. But most believed it was a price worth paying.
"I think the brokers, Schwab included, are really redefining themselves as asset gatherers, and as they look at where the growth is in the asset management sector, it's at the top of the food chain," said Tom Theurkauf, a banking analyst with Keefe Bruyette & Woods. "This deal is a great value proposition for both shareholder groups."
Indeed, the agreement appears to once again give Schwab a distinct leg up on some of its closest competitors like Morgan and Merrill, which have made significant strides in establishing competitive online and discount brokerages.
The deal "clearly fires a powerful salvo against firms that are now Schwab's direct competitors -- Merrill Lynch & Co. and Morgan Stanley Dean Witter," agreed Dennis Gallant and John Payne, asset management consultants with Cerulli Associates, in a research report released Thursday afternoon.
"The U.S. Trust Corp. acquisition proves that the coming war between U.S. financial services firms isn't between the low end and the high end -- online brokerages and private banks -- but between firms who can service both under one brand name," they said.
Attracting the high-end client
Based in New York, U.S. Trust had $86 billion in assets under management last year, a majority of which came from wealthy individuals and institutions.
The company offers trust, estate planning and private banking services to its clients, including individual account management for clients with assets in the $2 million to $50 million range.
In addition, U.S. Trust provides advisory services to an additional $350 billion in assets under management, presenting Schwab further opportunities to sell its resources, said Ron Baron, chairman and chief executive of Baron Capital Management, which owns more than 24 million Schwab shares in its various mutual funds.
"Schwab bought a really great, fast-growing business and they bought it at a reasonable price," said Ron Baron, "This just helps assure me that we are going in the right direction with our investment."
Such personalized service historically has been uncommon at Schwab, which converted to a discount brokerage during the mid-1970s to provide investors a cheaper alternative to sharply rising brokerage fees. The company currently has roughly 6.4 million customers and adds roughly 100,000 new accounts per month.
However, Schwab recently has started offering more access to its research and referring customers to independent advisors for asset allocation advice to help counter competitive pricing packages from a plethora of new online brokerage.
The 5,600 independent advisors served by Schwab's institutional division now manage more than 30 percent of Schwab's customer assets and 10 percent of its customer accounts.
The addition of U.S. Trust's research capabilities and wealth management expertise will accelerate that trend, company officials said.
"We believe very passionately that the future service to high-net worth, affluent individuals and families will depend on a combination of high-touch and high-tech," said H. Marshall Schwarz, chairman and chief executive officer of U.S. Trust.
The addition of U.S. Trust will help Schwab tap into that growing population of wealthy individuals.
Company officials estimated more than three million households now have potential investment assets in excess of $1 million.
Schwab said it plans to apply to become a financial holding company under the Financial Services Reform Act of 1999. 
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