After announcing a deal last month to divest U.S. Trust Corp., its New York private banking arm, Charles Schwab Corp. indicated it could use the proceeds for acquisitions.
The San Francisco brokerage company did not wait long. On Friday, it announced what analysts said may be the first such acquisition: a $115 million deal to buy 401(k) Co. from Nationwide Financial Services Inc., a Columbus, Ohio, insurer. The deal for the Austin unit would expand Schwab's 401(k) business into a new segment.
Schwab would become a player in the "mega-plan segment" - 401(k) plans for large companies - that caters to clients with more than $500 million of assets, said James McCool, an executive vice president in Schwab's corporate and retirement services division.
"That has not been up until now a focus or a significant investment," he said. "The acquisition of the 401(k) Co. is an additive strategy to our current service and channels strategy."
In a research note, Howard Chen of Credit Suisse Group, wrote, "The 401(k) Co.'s focus on the mega-market plan should provide a nice complement to Schwab's existing small- and middle-market emphasis. We would anticipate more in the way of fill-in acquisitions akin to this one for Schwab."
Both the 401(k) deal and Schwab's $3.3 billion sale of U.S. Trust Corp. to Bank of America Corp. in Charlotte are expected to close in the first quarter. Schwab would reap $2.5 billion in proceeds from U.S. Trust.
During an investor day Dec. 5, chairman and CEO Charles R. Schwab said Schwab could use the cash from the U.S. Trust deal for acquisitions to expand its 401(k) business or for deals that would bolster its nearly four-year-old Schwab Bank.
Brad Hintz at Alliance Bernstein LP's Sanford C. Bernstein LLC applauded Friday's deal, saying the 401(k) business is a high-growth segment and Schwab is already strong in some parts of it. "The idea of being a management team that rolls up some 401(k) activities: That is really Finance 101 and very, very basic good strategy."
Denise Valentine, a senior analyst at the Boston research firm Celent LLC, agreed. Buying 401(k) Co. is a "clever" way to expand into the mega-plan segment, which is tough to break into, she said.
"Part of the leap is to jump over that hurdle and get your first clients," she said. "It may not be a lot of money that they spend, and it may be just a few clients, but it could be the difference for a machine like Schwab that can take something and then build on it."
401(k) Co. supplies plan administration to more than 100 companies, with 400,000 retirement plan participants nationwide. It has client assets of $22 billion.
Schwab's Mr. McCool predicted more deals in the retirement sector.
"I could definitely see" further purchases to expand the 401(k) business, he said. "We'll continue to be on the lookout. If there is something that makes sense, as the 401(k) Co. did, we will certainly apply our efforts to make even greater expansion and investment into this business."
However, Sanford C. Bernstein's Mr. Hintz said that Schwab's ambitions may be bigger. "It looks like they are not taking E-Trade off the table," he said. E-Trade's banking business would be attractive to Schwab, he said.
"There are certainly advantages to E-Trade, but it's really an issue of pricing. No one would argue there are not synergies between the firms," Mr. Hintz said.
A Schwab spokesman declined to discuss specific deal possibilities but said the company is "neutral on a consolidation play" in the brokerage business and does not see advantage in deals that would expand the transaction side of its business.
An E-Trade spokeswoman declined to comment.
