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Business Acquisition
9 Months Ended
Sep. 30, 2011
Business Acquisition
3.   Business Acquisition

On September 1, 2011, the Company completed its acquisition of all of the outstanding common shares of optionsXpress Holdings, Inc. (optionsXpress) for total consideration of $714 million. optionsXpress is an online brokerage firm primarily focused on equity option securities and futures. optionsXpress’ brokerage platform provides active investors and traders trading tools, analytics and education to execute a variety of investment strategies. The combination of optionsXpress and Schwab offers active investors an additional level of service and platform capabilities.

Under the terms of the merger agreement, optionsXpress stockholders received 1.02 shares of the Company’s common stock for each share of optionsXpress stock. As a result, the Company issued 59 million shares of the Company’s common stock valued at $710 million, based on the closing price of the Company’s common stock on September 1, 2011. The Company also assumed optionsXpress’ stock-based compensation awards valued at $4 million.

The results of optionsXpress’ operations have been included in the Company’s condensed consolidated statements of income for the third quarter and first nine months of 2011 from the date of acquisition. The amounts of optionsXpress’ net revenues and net loss from September 1, 2011, were $17 million and $2 million, respectively.

The following table summarizes the preliminary allocation of the purchase price to the net assets of optionsXpress as of September 1, 2011:

 

Fair value of common stock issued

   $     710   

Fair value of equity awards assumed

     4   
  

 

 

 

Total consideration paid

   $ 714   
  

 

 

 

Fair value of net assets acquired

   $ 207   
  

 

 

 

Preliminary goodwill (1)

   $ 507   
  

 

 

 

 

(1) 

Represents a non-cash investing activity.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition date. The allocation of the purchase price is preliminary and subject to further adjustment as information relative to closing date fair values and related tax balances are finalized.

 

     September 1,
2011
 

Assets

  

Cash and cash equivalents

   $ 84   

Cash and investments segregated and on deposit for regulatory purposes

     1,074   

Receivables from brokers, dealers, and clearing organizations

     40   

Receivables from brokerage clients

     185   

Other securities owned

     32   

Intangible assets

     285   

Other assets

     29   
  

 

 

 

Total assets acquired (1)

   $     1,729   
  

 

 

 

Liabilities

  

Payables to brokerage clients

   $ 1,221   

Deferred tax liability

     108   

Long-term debt (2)

     110   

Accrued expenses and other liabilities

     83   
  

 

 

 

Total liabilities assumed (1)

   $ 1,522   
  

 

 

 

Net assets acquired

   $ 207   
  

 

 

 

 

(1) 

All assets and liabilities, except for cash and cash equivalents, represent non-cash investing activities.

(2) 

The Company paid off long-term debt acquired from optionsXpress subsequent to the acquisition date in September 2011.

 

The preliminary goodwill of $507 million was assigned to the Investor Services segment and will not be deductible for tax purposes.

The Company recorded preliminary intangible assets of $285 million, which are subject to amortization and will be amortized over their estimated useful lives. The following table summarizes the preliminary estimated fair value and useful lives of the intangible assets.

 

0000 0000

September 1, 2011

   Estimated
Fair Value
     Estimated
Useful Life
(In Years)
 

Customer relationships

   $     200         11   

Technology

     70         9   

Trade name

     15         9   
  

 

 

    

 

 

 

Total intangible assets

   $ 285      
  

 

 

    

The following table presents pro forma financial information as if optionsXpress had been acquired on January 1, 2010. Pro forma net income for the third quarter and first nine months of 2011 were adjusted to exclude $10 million and $12 million, after tax, respectively, of acquisition related costs incurred by the Company in 2011. Pro forma net income for the first nine months of 2010 was adjusted to include these costs. Additionally, pro forma net income below excludes $15 million, before tax, of acquisition related costs because these costs were incurred by optionsXpress prior to the acquisition date. Pro forma net income also reflects the impact of amortizing purchase accounting adjustments relating to intangible assets, net of tax, of $6 million in both of the third quarters of 2011 and 2010, $17 million in the first nine months of 2011, and $18 million in the first nine months of 2010.

 

000000 000000 000000 000000
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Net revenues

   $     1,222       $     1,116       $     3,744       $     3,297   

Net income

   $ 231       $ 129       $ 726       $ 343   

Basic EPS

   $ .18       $ .10       $ .57       $ .27   

Diluted EPS

   $ .18       $ .10       $ .57       $ .27   

The pro forma financial information above is presented for illustrative purposes only and is not necessarily indicative of the results that actually would have occurred had the acquisition been completed at the beginning of 2010, nor is it indicative of the results of operations for future periods.