Options broker ready for an offer

Cash pile, slack stock make optionsXpress an inviting target

Oct 10, 2010 @ 12:01 am

By Lynne Marek

With growth slowing and the industry consolidating around him, optionsXpress Holdings Inc. chief executive David Fisher is ready to sell.

The Chicago-based options brokerage “would likely be inclined to accept” a buyout offer at the right price, according to a report by analyst Richard Repetto at Sandler O'Neill & Partners LP, who spoke with Mr. Fisher last month.

Mr. Fisher doesn't dispute the account of his conversation with Mr. Repetto, but in an interview, he hedged slightly.

“If the right offer comes around, we absolutely would consider it — we're not entrenched here,” Mr. Fisher said. At the same time, “we certainly don't feel like we need to sell the business today,” he said.

Mr. Fisher, 41, also suggested 10-year-old optionsXpress, which posted $233.4 million in revenue last year and employs 425, could re-ignite its growth by acquiring smaller firms. Its new-account openings declined 13% in the second quarter from the year-earlier period, reflecting a broader slowdown that is contributing to consolidation among retail brokers.

The company has $260 million in cash that could be used for acquisitions. It bought Optionetics Inc. last year and futures broker Open E Cry LLC in 2008.

Stock and options broker TradeKing might be a target, William Blair & Co. analyst Mark Lane said. A spokeswoman for TradeKing declined to comment.

“We look to get larger as a firm, both in organic growth and in acquisitions,” Mr. Fisher said.

But with its shares trading near a 52-week low, optionsXpress makes an attractive target for larger firms such as Fidelity Brokerage Services LLC and The Charles Schwab Corp., observers say.

“Many of the large players believe they're in the final innings of this [consolidation] game,” said Michael Wong, a Morningstar Inc. analyst. “OptionsXpress is one of the last retail brokers that is out there that is digestible and [large enough] to add to a larger retail broker's platform.”

A buyout of optionsXpress would be the second recent acquisition of an independent brokerage in Chicago. TD Ameritrade Holding Corp. last year bought online broker thinkorswim Inc. for $606 million.

Mr. Fisher declined to discuss possible buyers.

Representatives of Schwab and Fidelity parent FMR LLC declined to comment.

OptionsXpress is affordable for either at its current market capitalization of $883 million. But Mr. Fisher wants a price that reflects what he calls the “normalized” earnings of the company, not the disappointing profits of the second quarter, when trading volumes were down across the industry.

Net income fell 3% in the second quarter to $15.6 million, or 27 cents a share.

At $15.38 as of Oct. 1, optionsXpress stock was off 10% over the past 12 months.

Analysts say that the company would be unlikely to draw a premium amid the industry's malaise.

TD Ameritrade paid a 54% premium for thinkorswim, but that acquisition was completed in June 2009, before the industry's downswing.

“One of the reasons the company may still be independent is because they don't believe the market or buyer is willing to place a value on the company that they think is justified,” Mr. Lane said.

A deal for optionsXpress would be difficult without the support of co-founder and chairman James Gray, who along with his G-Bar LP owns about 22% of the stock.

He emphasized that the company is growing and “highly profitable.” But, Mr. Gray said, “We have a fiduciary responsibility to maximize shareholder value, and we'll pursue all paths to maximize it.”

Lynne Marek is a senior reporter at sister publication Crain's Chicago Business.

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