Yesterday Charles Schwab
laid out its plans for a capital restructuring that will include up to $2.3 billion of stock buybacks and a $1.2 billion special dividend. Coming just a day after Bank of America's
check for $3.3 billion in payment for U.S. Trust
presumably cleared, what does the restructuring mean? And, why is Schwab returning more cash to its shareholders than it is getting in the U.S. Trust deal?
Even more, when all is said and done, Schwab said that it plans to issue $750 million of bonds to finance some of the buybacks and dividend. Does that make sense?
After taxes, Schwab will receive $2.7 billion of the $3.3 billion Bank of America paid U.S. Trust. That amount comes to about 10 percent of Schwab's $27 billion market cap. Looked at another way, the $2.7 billion in new cash would nearly double the $3.2 billion in cash Schwab held at the end of the quarter.
In other words, it is a lot of money to leave sitting in a sweep account.
That may be one reason why the markets took the announcement of a smaller pie of shares as good news. Investors pushed the price of Schwab shares up 7.2 percent on the news of the plan. (For those who argue that the markets are efficient, the gain in the stock price neatly jibed with the 7 percent decrease in float due to the buyback).
The plan should also be causing founder Charles Schwab
, now 69, to rest a little easier. The entreprenuer is taking some chips off the table as part of the buybacks (he will sell enough shares to leave his stake at 18 percent of the company). He will also be a chief beneficiary of the $1.2 billion special dividend. Based on his holding of 18 percent of the company (a stake that will remain the same even after the buyback due to careful structuring), Schwab will receive dividend checks worth nearly $216 million.
What the restructuring says most emphatically, though, is this: Schwab is no longer a buyer.
Last November, Chuck Schwab himself told analysts on the street that he was looking to purchase a 401(k) provider. Even as he spoke, Schwab retirement head Jim McCool
was deep into negotiations to buy the 401(k) Company
. Don't look for another major deal in the 401(k) space anytime soon as Schwab got everything it needed in time for Christmas in that $115 million deal.
More recently two hedge funds -- Jana Partners
and S.A.C. Capital Advisors
-- looked at Schwab's growing cash pile and tried to greenmail TD Ameritrade
into selling itself to Schwab. (TD Ameritrade now has a market cap of $12.35 billion, meaning Schwab would have been $6 billion short of an all cash deal).
Schwab responded with a "not interested." That reply is easier to take seriously given Schwab's move yesterday.
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