Schwab to Buy Day-Trading Software Firm
Charles Schwab Corp. agreed Wednesday to pay $490 million in stock to acquire a day-trading software firm, a bet that the ranks of individual investors who trade actively will continue to surge.
The nation’s top online brokerage said it would swap 13.7 million shares to buy closely held CyBerCorp Inc., an Austin, Texas-based brokerage and software firm with roots in the day-trading industry.
Separately, Schwab also said it is lowering commissions charged to its most frequent traders, to as low as $14.95 from $29.95.
Together, the two moves reflect that an increasing number of investors are shunning long-term buy-and-hold investing in favor of quick-fingered stock trading--and that Schwab would risk losing those customers if it didn’t lower prices and offer sophisticated trading systems.
“If [Schwab] felt like [trading] volumes were going to fade, and people are just going to invest for the long term, and individual investors are going to go back to mutual funds, I don’t think they would have just given up $500 million in stock,” said Greg Smith, online brokerage analyst at Hambrecht & Quist in San Francisco.
The deal marks Schwab’s second major acquisition proposal this year. Less than three weeks ago, the San Francisco-based firm agreed to shell out $2.9 billion in stock to acquire U.S. Trust Corp., a money manager focusing on affluent clients.
The two acquisitions demonstrate how Schwab is fighting to hang on to customers on both ends of the investing spectrum. It bought U.S. Trust to serve investors who typically need more financial hand-holding. But Schwab still wants to appeal to hyperactive traders, who make up one of the industry’s fastest-growing and most profitable customer segments.
CyBerCorp was founded in 1995 by Dublin-born Philip Berber, who once designed artificial intelligence systems for military uses. The company got its start developing day-trading software just as that phenomenon began to explode in popularity. About 18 months ago, CyBerCorp launched an online brokerage unit that now represents more than 90% of its revenue.
Along with a handful of other closely held firms, CyBerCorp was coveted by potential suitors for its so-called smart order-routing technology. Smart order-routing systems quickly and efficiently scan electronic markets to find the best prices available for stock traders. The systems are expected to have wide applications in institutional and international markets in the near future.
Over the last year, CyBerCorp had held discussions with a number of big Wall Street firms--including Lehman Bros., Merrill Lynch & Co. and Reuters Group’s Instinet--about equity investments or an outright acquisition, sources say.
Schwab appears to be paying a high price for CyBerCorp, which had revenue of $25 million and net income of $4 million last year. However, sales are on track to hit at least $50 million this year and could even reach $80 million, Smith said. At that level, Schwab would be paying about six to seven times CyBerCorp’s 2000 sales, about the same valuation that Schwab’s own shares trade at today, he said.
CyBerCorp is growing quickly. It has 2,700 brokerage customers doing 22,000 trades a day, up from 200 customers averaging 2,000 daily transactions a year ago.
On Wednesday, the two firms sought to downplay CyBerCorp’s ties to day trading, which has suffered a black eye in the last year over allegations by regulators of widespread losses by such traders.
“We don’t look at this as a day-trading acquisition,” said Lon Gormon, president of Schwab’s capital markets and trading group. “It’s a technology acquisition.”
Until recently, No. 2 online broker E-Trade Group had been in merger discussions with another firm developing smart order-routing technology, New York-based Tradescape.com. But E-Trade ended those talks about two weeks ago, according to sources.
“It just dragged on too long,” said one source. “The talking kind of went on forever until it faded away.”
Schwab’s cut in commissions affects only a small number of clients. Schwab will continue charging $29.95 for a client’s first 30 trades each quarter. The rate will be lowered to $19.95 for trades 31 through 60. The lowest rate, $14.95, will apply when doing 61 or more trades a quarter.
Schwab shares added 13 cents to close at $35.75 on the New York Stock Exchange.
