Account Holders Win in Online Brokerage Consolidation

by: Mike Maher

AT&T's (NYSE:T) merger with T-Mobile (OTCQX:DTEGY) grabbed headlines yesterday, overshadowing the planned acquisition of optionsXpress (NASDAQ:OXPS) by Charles Schwab (NYSE:SCHW). The acquisition brings back memories of the large online brokerage consolidation last seen in 2005, and may signal further consolidation in the space.

Here is a rundown on the deal, as well as how it affects other major players in the space.

In an effort to gain more exposure to the growing use of options by individual investors, Schwab is paying $1 billion dollars, or $17.91 per share, to acquire optionsXpress. The deal, in which holders of OXPS will receive 1.02 shares of SCHW, is being done at a 17% premium over optionsXpress's closing price on Friday.

OptionsXpress had 385,200 accounts with assets of $8. 1 billion at the end of February, compared to Schwab's $1.6 trillion in assets, and the deal will give account holders in the new company access to products from both institutions. The deal is expected to close in Q3, and Schwab plans to keep both brands for the time being. In terms of different commission rates for each company, Schwab plans on keeping the lower of the two rates on overlapping products, and applying that rate to both platforms.

The deal is expected to see $80 million in synergies and will boost earnings in the first year after the close of the acquisition.

While Schwab is not getting much larger with the deal, other online brokers are surely looking at their options, as are account holders. A look at Barron's rankings of online brokers for this year shows TD Ameritrade (NASDAQ:AMTD), Interactive Brokers (NASDAQ:IBKR), optionsXpress (OXPS), Schwab (SCHW), E*Trade (NASDAQ:ETFC), TradeStation (NASDAQ:TRAD) and Merrill Edge as the main publicly traded players in the space, although Merrill is swallowed up inside Bank of America (NYSE:BAC) and is not a real pure play. There are a number of smaller players, adding further credence to the notion that a push towards further industry consolidation may be coming.

Interactive Brokers (IBKR) and TradStation (TRAD) are the small players in the group, both with market caps below the $1 billion for which optionsXpress is being purchased. Expect TD Ameritrade and Schwab to continue to acquire smaller players in the space, growing total accounts through acquisition as well as organic growth.

This will lead to broader access to products for account holders, increasing the appeal of larger brokers. While there is a limited number of ways to play the consolidation, all investors stand to benefit from greater access to investment products and lower commissions.

I currently use optionsXpress and am interested to see what new services I will have access to after the deal closes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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