Bank of America (NYSE: BAC ) is going up-market, shelling out $3.3 billion for U.S. Trust, a venerable firm that focuses on wealthy clients. As a division of Charles Schwab (Nasdaq: SCHW ) , U.S. Trust gained little traction, but as part of the Bank of America powerhouse, things are likely to improve.
U.S. Trust got its start in 1853, which was certainly good timing, as the country was embarking on the Industrial Revolution. Over time, the company went on to manage the trusts of wealthy clients such as United States Steel and International Paper. And certainly U.S. Trust has been a bedrock of stability -- withstanding inflation, depressions, stock market crashes, and world wars.
However, by the late 1990s, the firm realized that times were changing. With the tech boom came a new generation of multimillionaires who were comfortable with more cutting-edge approaches.
Thus, at the top of the bull market (May 2000), Schwab purchased U.S. Trust for about $2.9 billion. With Schwab's tech savvy -- and dot-com client base -- there was renewed hope for growth at U.S. Trust.
But, of course, this never materialized. In fact, as Schwab's core business faltered, it didn't have the resources to improve U.S. Trust and compete effectively against tough players like JPMorgan Chase (NYSE: JPM ) and Northern Trust Corporation (Nasdaq: NTRS ) .
Now, as part of Bank of America, there should be improved synergies. Actually, the company is already a major player in private banking, with about $167 billion under management. And with the deal, Bank of America will become the largest private bank in the U.S.
Bank of America will also get a larger chunk of the ultra-wealthy category -- those clients with at least $25 million in assets -- since U.S. Trust has 724 such clients.
Interestingly enough, Bank of America's private bank division has standout operating margins of 44%, which compares to U.S. Trust's 23% margins. Thus, it looks like Bank of America can realize cost synergies to boost margins.
It's no surprise that Bank of America thinks the deal can be accretive by $0.01 per share in 2008. And for a company of its size, this is definitely significant. After all, the company's deposit base is about 9%, which is close to the legal limit of 10% for the U.S. (according to federal regulations).
In other words, Bank of America needs to move into non-bank segments to find growth, and the U.S. Trust acquisition is a good choice in terms of cost and product synergies.
Further Foolishness:
Schwab is a
Stock Advisor
recommendation. JPMorgan Chase and Bank of America are
Income Investor
recommendations.
Fool contributor
Tom Taulli
does not own shares mentioned in this article.
He is currently ranked 51 out of 13,432 in Motley Fool CAPS.
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