Newspaper article THE JOURNAL RECORD

Schwab Shifts Gears, Dives into Stock Offerings

Newspaper article THE JOURNAL RECORD

Schwab Shifts Gears, Dives into Stock Offerings

Article excerpt

Charles Schwab, the United States' largest discount brokerage firm, has signed a deal with three Wall Street firms to help them underwrite public stock offerings, a move that thrusts Schwab into a part of the financial markets that it had avoided.

Under the agreement, customers of Schwab's retail brokerage service will get an opportunity to invest directly in public stock offerings led by the Credit Suisse First Boston unit of Credit Suisse Group, Hambrecht & Quist or J.P. Morgan.

The agreement is a huge departure from Schwab's traditional business of matching customer orders to buy and sell stocks and bonds. As an underwriter, Schwab will be putting its own capital at risk, at least theoretically, and will be taking a direct role in helping corporations raise money. Schwab's arrangement is therefore broader -- and riskier -- than a similar deal announced in January by Fidelity Investments and Salomon Brothers, in which Fidelity agreed to act as a distributor of up to 10 percent of all Salomon-managed equity offerings. Both deals serve to give retail investors greater access to initial public offerings, in which companies raise money by selling an ownership stake to the general public. Traditionally, those offerings are sold exclusively to institutional investors, which can reap great profits by reselling shares of hot offerings once formal trading of the shares begins on a stock exchange. The agreement by Fidelity, which is a unit of FMR and the operator of the country's second-largest discount brokerage business, makes it a sales agent in offerings in which Salomon serves as the lead manager. Fidelity will take orders from its retail customers for shares of an offering, earning sales commissions, but it is not required to first buy the shares itself, which would put its own capital at risk. In contrast, an underwriter buys at a discount, and then resells at the stock's offering price, shares of a company's stock -- a potentially more profitable role for the firm. Underwriting does, however, put a firm's capital at risk, although usually for only a short time, such as overnight. Still, there is always the possibility that a sudden change in market or economic conditions, or a miscalculation of demand for the shares among investors, will leave the underwriter with more shares of a company's stock than it can quickly resell. Lon Gorman, president of Charles Schwab Capital Markets and Trading, said in an interview that the deal "expands the universe of investment opportunities available to our base of customers." Schwab does not intend, he said, to move further toward becoming a full-service brokerage firm, like Merrill Lynch or Smith Barney, which underwrite stock issues, provide brokerage services and offer a broad array of other services, including investment-banking advice to corporations. …

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