Schwab Agrees to Pay B of A $230 Million for Brokerage
BankAmerica agreed Monday to sell its Charles Schwab & Co. discount stock brokerage unit to a group headed by Charles R. Schwab, its founder, for $230 million and a share of the company’s future appreciation.
The agreement caps three months of arduous negotiations, during which the 49-year-old Schwab threatened to abandon the company if it were sold to someone else. Schwab is a powerful marketing symbol for the company.
BankAmerica, which purchased the Schwab company for $57 million in common stock in 1982, will book a pretax gain of $130 million. The deal is expected to close on or before March 31.
Share in Growth
The parent firm of Bank of America will receive $175 million in cash and $55 million of 9% bonds due in 2002 for the company. In addition, BankAmerica will swap an existing $50 million advance to Schwab for $50 million in bonds bearing interest at 10% and coming due in 1998.
The deal provides one additional sweetener for BankAmerica: the right to receive from the new Schwab company 15% of the appreciation in value of the company’s common stock during the next eight years.
The kicker could prove lucrative to BankAmerica if the discount brokerage firm’s robust growth continues and Schwab, as expected, sells shares of his company to the public.
“It’s a very buoyant stock market,” the entrepreneur said Monday. “We have to look at (going public) very seriously.”
The Schwab group, it is understood, has received a firm commitment for financing the deal from Security Pacific Bank. Initially, Schwab, members of the firm’s senior management and employees will hold about 80% of the firm, Schwab said, with “friendly outsiders” owning the rest.
Schwab described himself during a press conference in his 29-story headquarters building in San Francisco as “tickled pink” and “absolutely delighted.”
He might have added “deeply relieved.” Schwab’s marriage with BankAmerica soured early as the bank’s loan woes mounted and the value of the stock Schwab received plummeted. Schwab eventually sold his stake in BankAmerica and resigned as a director last year.
Corporate cultures also clashed. There was real friction, for example, when a BankAmerica bureaucrat tried to replace Schwab’s BMW- and Jaguar-studded automobile fleet with the Detroit models prescribed by bank policy.
And Schwab’s impatient marketing people waged battle after battle with the cautious lawyers and bureaucrats at the bank.
‘Instant Credibility’
Still, Schwab insisted Monday that he had “no regrets” about his experience with BankAmerica. “They added instant credibility to this company and to the discount brokerage industry,” Schwab said.
Indeed, discount brokers--who execute transactions for clients but do not offer recommendations on individual stocks--were viewed as vaguely disreputable by many investors until BankAmerica broke regulatory ground with its purchase of Schwab. Many big banks quickly jumped into the business.
Schwab noted that B of A also added about 100,000 clients to his firm, which now has 1.7 million accounts in 100 offices in the United States and Hong Kong.
Still, he said, “the synergies between the two companies weren’t as strong as I’d expected.”
Moreover, Schwab soon began to chafe at what he called “antiquated and restrictive banking regulations” that prevented his company from offering investment information, municipal bonds, real estate and its own line of mutual funds. The firm will offer such products now, Schwab said.
The sale of Schwab will slice $1.5 billion in assets from BankAmerica’s shrinking balance sheet and 2,000 employees from its payroll.
The sale will also bolster BankAmerica’s defense against a hostile takeover attempt by Los Angeles-based First Interstate Bancorp by boosting BankAmerica’s capital ratios and making BankAmerica less attractive to First Interstate’s expansionist chairman, Joseph J. Pinola.
A SHRINKING B OF A
Recent major divestitures:
September, 1985--World headquarters building to real estate magnate Walter Shorenstein.
Price: $660 million.
November, 1985--FinanceAmerica consumer lending unit to Chrysler.
Price: $405 million.
July, 1986--Tokyo home of the head of B of A’s Asia division to Japanese real estate firm.
Price: $58 million.
September, 1986--Los Angeles headquarters building to Shuwa Investments.
Price: $620 million.
October, 1986--Auto leasing subsidiary to General Electric Credit.
Price: $215 million.
December, 1986--Consumer trust department to Wells Fargo & Co.
Price: $100 million.
December, 1986--Banca d’America e d’Italia to Deutsche Bank AG.
Price: $603 million.
February, 1987--BankAmerica Finance Ltd. (U.K.) to Bank of Ireland.
Price: $38 million.
February, 1987--Charles Schwab & Co. discount brokerage to group led by Charles Schwab.
Price: $230 million.
