Charles Schwab Corp., which built a business acting as the investment cradle to millions of investors staked a claim to its customers' golden years with a $2.7 billion deal for New York banking company U.S. Trust Corp.
While noteworthy as the first financial services convergence transaction since the Gramm-Leach-Bliley Act of 1999 (see story page 4), the deal also puts San Francisco-based Schwab, which almost perpetually reinvented itself since its founding in 1971 as a no-frills discount brokerage, in direct competition with industry heavyweights like Merrill Lynch & Co.
Indeed, Schwab's announcement came just six weeks after Merrill Lynch rolled out its on-line trading capability with a commission schedule on a par with Schwab's $29.95 per trade.
"On the one hand Merrill and Morgan Stanley are competing with Schwab for relatively young investors," said Guy Moszkowski, an equity analyst and managing director at Citigroup's Salomon Smith Barney Inc. unit.
"But Schwab didn't have the advisory component to upgrade to next level of service which yields more basis points," Mr. Moszkowski observed.
To some degree, Schwab already caters to high net worth investors. It boasts some 5,600 affiliated investment advisors and offers services ranging from rebates on ATM fees to tax, attorney and other advisor referrals. But U.S. Trust, which manages $86 billion of assets, mostly for clients with investable assets of $2 million and up, vaults Schwab to a new level.
"This is about fulfilling our commitment to our most affluent customers, who have seen their assets grow over the years," said Charles R. Schwab, chairman and co-chief executive officer of the San Francisco company at a press conference in New York.
For U.S. Trust, Schwab's Internet capability provides the ability to expand technologically said Jeffrey S. Maurer, president and chief operating officer of the 142-year-old bank company. An investment, said Mr. Maurer "that would greatly strained our resources."
The deal, which is expected to close in July pending regulatory approval, pits Schwab against full service brokers that have mimicked Schwab's successful on-line brokerage strategy.
The deal is turnabout for Schwab and the banking industry. The brokerage, which has had a trust charter since 1992, was purchased by the old BankAmerica Corp. in 1983, which sold the firm to its management in 1987.
Schwab's bid for U.S. Trust comes at time when there are more than 3 million households in the United States with investable assets of over $1 million. And Schwab executives anticipate that number to grow by as much as 25% within five years.
Schwab isn't just taking on the full-service players the company is also throwing its hat into the gilded ring dominated by old line private banks like J.P. Morgan & Co. and Northern Trust, analysts said.
But Schwab may have some difficulty selling the deal to their army of affiliated investments advisors, who now constitute the sole advisory link to Schwab's 6 million plus customers.
"If I'm in the Registered Investment Advisory network now I'm competing," observed Steven M. Galbraith, an equity analyst with New York-based Sanford C. Bernstein & Co.
Schwab could have an even tougher problem on sprucing up its image for old school U.S. Trust clients, who might "look askance" at doing business with what they regard as a discount brokerage, Mr. Galbraith said.
Raymond Pryor, one New York-based U.S. Trust client said he isn't planning on transferring his account to another private banking company - just yet.
"At first blush it was a huge surprise," Mr. Pryor said, who said he got on the phone to ask his U.S. Trust advisor as soon as he heard the news Thursday morning.
"But I don't think Schwab is trying to tone down U.S. Trust's image," said Mr. Pryor, who said he anticipates the same level of personal service at the bank he's received since opening his account in the late eighties.
For Schwab's part, the company is not abandoning its discount brokerage customers but wants to tap all investors. Schwab's chairman wants to cater to everyone, "from those taking their first steps towards becoming investors to those looking to manage their accumulated wealth for themselves and their families," Mr. Schwab said.
Once the deal closes, U.S. Trust will be a separate subsidiary of Schwab and retain a separate brand and its New York headquarters.
H. Marshall Schwarz will continue as chairman and chief executive officer of U.S. Trust, reporting to David Pottruck, Schwab's president and co-CEO. Both Mr. Schwarz and Mr. Maurer, U.S. Trust's president, will join Schwab's board.
Analysts, who largely applauded the deal, conceded that it was a little pricey; some estimated it would cost as much as 35 times estimated earnings for 2000. Wall Street reacted positively, and in late trading on the New York Stock Exchange, Schwab's stock was up $2.75 a share, at $40.375, while U.S. Trust rocketed 68.62%, to $133.
Amy L. Anderson contributed to this article