Sometimes it pays to pay even when you’re used to chasing discounts. Charles Schwab (SCHW), one of America’s leading discount brokerages, is offering $1B in stock for optionsXpress (OXPS). Thumbnail sketches are in order.
This is an all-stock deal, with 60mm new SCHW shares going to OXPS holders. SCHW shareholders will experience dilution of about 5%, which isn’t bad considering they’re getting a huge options brokerage’s market position. OXPS’s ROE of 25% is unbelievably healthy, although its three straight years of declining net income is a cause for concern. OXPS’s accounts payable and long-term debt are manageable loads for SCHW’s balance sheet to bear.
Writing puts under OXPS would be tempting if this were a cash deal, but the all-stock characteristic would make such a move very vulnerable to market volatility. That is a huge risk to take with OXPS’s P/E over 20 and SCHW’s over 47.
Schwab is probably making the right long-term move here, but the risk factors above take the joy out of any short-term special situation strategy for investors.
Full disclosure: No position in SCHW or OXPS.