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Online options brokerage optionsXpress had been looking for a merger partner for nearly three years before it accepted an offer from Charles Schwab Corp. in March, according to a filing with the Securities and Exchange Commission. Growing competition in the industry was one reason the options company decided to put itself on the block, the registration statement shows.
“Scale is everything. If you think of a technology play or an online play, pricing pressure is going to happen,” says consultant Timothy Welsh of Nexus Strategy in Larkspur, Calif. “In order to be able to live in that new paradigm of lower prices, you’ve got to be big and spread the fixed costs over a much larger client base.”
Last month, Schwab announced plans to buy optionsXpress in a stock trade that valued the acquisition at about $1 billion; both sides hope to close the deal in the third quarter of this year, following approvals by optionsXpress shareholders and regulators. As part of the deal, Schwab will also take over brokersXpress, a broker/dealer owned by the company.
But closing a deal previously had been a problem for Chicago-based optionsXpress. In 2008, it attempted to buy another online options trading company but was frustrated when a “major online brokerage” bought it instead, the filing stated. (Names were not disclosed, but TD Ameritrade announced in January 2009 that it would buy the online options trader thinkorswim for $606 million.) From 2008 into 2010, optionsXpress also discussed potential partnerships with three other companies, excluding Schwab, but was unable to reach a satisfactory deal. The company even considered going private but its business advisor, Evercore Group, didn’t think such a move could be done at a good price for shareholders.
Evercore did suggest Schwab as a potential partner, however. In November 2010, informal talks began between Schwab CEO Walt Bettinger and optionsXpress CEO David Fisher and Chairman James A. Gray. Both sides ultimately closed a deal that would provide 1.02 shares of Schwab stock for each share of optionsXpress stock. (It was a bigger price from Schwab’s original cash offer of $17 a share, the filing said.) Among the reasons cited in the filing for why the merger made sense for optionsXpress was the potential for stiffer competition in the near-term from larger competitors, the SEC filing said.