Lessons on M&A From Charles Schwab

By Tom Taulli

I just finished a great book about the life of Charles Schwab, called, well, Charles Schwab: How One Company Beat Wall Street and Reinvented the Brokerage Industry. Like any visionary, he went against the grain and made lots of gutsy decisions. But it was on May 1, 1975, that Schwab made his biggest bet. With the end of fixed commissions, he realized that there would be huge demand for discount brokerage services.

Schwab believed that it was critical to focus on growth and scale. Eventually, profits would come. In the early days, there were many critical moments. A big decision was to spend a huge amount on building a software system in the late 1970s.

Schwab & Co. was certainly able to grow year after year. The big problem: capital. There are strict capital requirements for broker dealers and Schwab & Co. was constantly feeling the pressure. On several occasions, Schwab had to personally guarantee loans to the company.

Selling out

In the early 1980s, despite a surge in business and the beginning of the bull market, Schwab & Co. was almost out of cash. What could Schwab do? He really had no choice and sought out a buyer for his company.

The buyer wound up being Bank of America, which offered two options: part cash and stock or just stock. Always the optimist, Schwab took stock, which amount to $53 million. However, after the deal was announced, Bank of America experienced problems and the stock started to fall.

What was even worse is that Bank of America was a huge bureaucracy. Schwab, on the other hand, liked quick action and growth. He was definitely stifled in the culture clash.

Buying back

By 1986, Schwab started to sell off his holdings and resigned from the board of Bank of America. He also offered to take the company private. The problem was: it would be a big price tag.

Interestingly enough, Bank of America made a huge blunder. According to Schwab's employment contract, he had the right to his own name. What was Schwab & Co. without its namesake?

It was enough to negotiate a good deal for Schwab to take back his company from Bank of America.

Tips

Although there are many lessons in the book, some of the important ones in regard to M&A include:

* Before merging with another company, look at the two cultures
* If you buy a company that is closely associated with the founder, you may have difficulties in selling off the company in the future.
* Big companies need to find ways to encourage entrepreneuralism in small companies that they buy.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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