Charles Schwab Goes Upscale

The line separating discount brokerages from full-service firms became thinner Thursday. San Francisco-based brokerage Charles Schwab announced it will acquire New York-based money management firm U.S. Trust for $2.7 billion in stock.

U.S. Trust is a money-management firm catering to high-net worth individuals and institutions. It provides services such as trust and estate services, private banking, financial planning, tax services and equity research. It caters to clients with $500,000 to $10 million in assets, but calls the $5 million to $10 million category its "sweet spot." It currently manages $86 billion in assets. Founded in 1853, U.S. Trust will maintain its brand and operate as a Schwab subsidiary.

"The combination will create a new model of wealth management for U.S. households," said Schwab's co-CEO David Pottruck during a conference call with analysts and press.

Schwab will also submit an application to the Securities and Exchange Commission to become a financial holding company under the Financial Services Reform Act of 1999. Although it is the first company to apply under the new legislation, officials at Schwab expect to attain the new status by May or June and close the merger with U.S. Trust in July.

The deal is significant for Schwab. In recent months, Merrill Lynch and Morgan Stanley have led the Wall Street pack into the game of Net-based, deep discount trading. Both firms are offering $29.95 online trades in an attempt to keep customer assets from those who have defected to cheaper e-brokers.

By the same token, Schwab hopes to keep high-end customers heading to full-service brokers to get a wider array of products and services. In the retail space, full-service firms and online brokerages are convening in the middle of the spectrum.

"Schwab has been trying to find its place, and seems to have decided recently it wants the upper end of the online market," says Bill Burnham, a general partner for Softbank Capital Partners who has covered the online brokerage market since its inception. "Moving into trust management is consistent with that."

While the deal appears perfect conceptually, some investors question the lofty price Schwab is paying for the money management firm. Schwab's stock fell in early morning trading, but investors appeared to change courses by day's end.

Its stock rose $2.75 to close at $40.38 after hitting a low of $33.88 earlier.

U.S. Trust, meanwhile, had a wild ride on Wall Street Thursday. The deal values U.S. Trust's stock at a 63 percent premium to its Wednesday closing price. As a result, enthusiastic investors bid its stock up $54.13, or 69 percent, to close at $133.

Analysts agree it was a pricey deal, but in this market it is difficult to determine what price is too high. When assets and complementary services of the two firms are combined, the price begins to look more reasonable.

"This is really the old school meeting the new school," says Greg Smith, equity analyst at Chase H&Q. "I think it's a great acquisition for them. They paid a heavy price, but it was not an unreasonable price when you work through the details of the deal."

Smith points out that Schwab's time to use its valuable stock currency to make an acquisition was long overdue. While competitor E-Trade bought four companies last year totaling $2 billion in stock, Schwab hadn't made a significant acquisition since 1995.

Lisa Shuchman contributed to this report.

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