I mentioned the possibility of a sale last month, which seemed like an obvious move at the time. From the beginning, Schwab's purchase of Soundview has been roundly criticized as a poor strategic fit and -- at $321 million in cash -- too expensive. By unloading the business after only nine months, at a price some have pegged at $300 million, Schwab has been forced to admit the validity of that assessment and wipe the slate clean from one of the missteps that led to former CEO David Pottruck's abrupt dismissal.
Schwab Soundview Capital Markets, which provides trading and equity research for broker/dealers and institutional clients, is also the second-largest market maker of Nasdaq securities. Last year, the division helped execute the trading of more than 33 billion shares, or roughly one-fourth of the total Nasdaq volume. Though the division was bolstered by the acquisition of Connecticut-based Soundview in January, Schwab has had an active equities trading presence since buying Mayer & Schweitzer back in 1991.
At the time, acquiring Soundview seemed like a good way to further diversify revenues away from the cyclicality of retail trading, by selling high-quality, independent equity research (even if it was narrowly focused) to institutional accounts. However, the capital markets division has since weighed heavily on Schwab's results. Last quarter, the division posted only a $1 million profit on $75 million in sales for an anemic profit margin of 1.3%.
If the deal is completed -- again, the two companies are only in talks, and nothing definitive has been announced -- UBS would pick up a solid business and something else valuable: Schwab's order flow. Currently, Schwab's capital markets division processes 90% of the firm's retail trades, and any deal would likely be contingent on this continuing.
Schwab, which is a Motley Fool Stock Advisor recommendation, would receive a nice pile of cash to deploy somewhere and the opportunity to move forward and focus resources on its battle with rivals Ameritrade
How have Schwab's recent travails impacted the bottom line? Catch up by reading these:
- Will Schwab Reward Patience?, by Steven Mallas
- How to Fix Schwab, by Roger Nusbaum
- The Return of Chuckie, by Bill Mann
- Reinventing Schwab, by Nathan Slaughter
Fool contributor Nathan Slaughter owns none of the companies mentioned.