Jefferies Reported in Talks With Schwab

Beleaguered discount brokerage firm Charles Schwab Corp., which has been pummeled by the drop in individual-investor stock trading, reportedly has held merger discussions with Los Angeles-based institutional trading firm Jefferies Group Inc.

San Francisco-based Schwab has held preliminary discussions about acquiring Jefferies in a deal that could be valued at $1 billion, the Wall Street Journal reported.

However, analysts Thursday questioned the wisdom of such a deal and said they doubt it would occur because of the contrasting cultures and business strategies of the two firms.

“I don’t think it’s going to happen. Schwab has too many issues right now,” said Richard Repetto, an analyst at Putnam Lovell Securities Inc.

Neither Schwab nor Jefferies would comment Thursday.

Buying Jefferies would help Schwab diversify its trading business, which is heavily dependent on small investors who have scaled back dramatically their trading during the bear market.

Schwab’s July trading volume was off 43% from a year earlier, and its earnings have fallen sharply. Schwab shares slipped 50 cents to close at $12.87 on the New York Stock Exchange on Thursday, their lowest close since late 1998. The stock is down 55% this year.

Jefferies, by contrast, has recently turned in a strong performance. Second-quarter earnings rose 34%, partly because institutional trading volume--trading done by mutual funds, pension funds and insurance companies, among others--has remained fairly steady. Jefferies’ shares closed up 62 cents at $36.65 on Thursday on the NYSE, after briefly hitting a 52-week high.

Through the first half of this year, 64% of Jefferies’ revenue came from stock and bond trading. Investment banking comprised 14%, though the firm has made a push to boost that part of its business.

Analysts said several factors make it unlikely that the companies would merge.

Though acquiring Jefferies would diversify Schwab’s stock trading operations, it would leave Schwab more reliant on that volatile business. The future profitability of stock trading has been thrown into question by Wall Street’s switch this year to quoting stock prices in decimals rather than in fractions. That has narrowed the profits that brokerage firms earn on each trade they handle.

Analysts also doubted that Schwab would want a presence in junk bond trading, another volatile business that comprises 8% of Jefferies’ revenue. Finally, analysts said that if Schwab delves into investment banking, it could do better than the Jefferies unit, which caters to mid-size companies.

However, the potential existence of talks indicates just how severe the bear market has been for Schwab and the dramatic measures it is considering in hopes of pulling out of its tailspin.

In recent years, Schwab has ventured beyond its roots as the first major discount broker. Last year, it bought U.S. Trust, a money management firm catering to wealthy clients, and CyBerCorp, a day-trading firm.

During the late 1990s, Schwab thought it was safe by catering to conservative investors and avoiding frenetic traders. However, Schwab has stumbled as many customers have stopped trading since the March 2000 stock market peak.

“The falloff in volumes has been more dramatic than most people ever imagined it would be,” said Russell Keene, an online brokerage analyst at Keefe, Bruyette & Woods Inc. “They’re in crisis management mode.”

Schwab laid off 11% of its staff at the end of April, and has warned that more cutbacks are possible.