Founder takes helm again at Schwab

Pottruck ousted as CEO after 2Q profit falls 10%

July 21, 2004|By NEW YORK TIMES NEWS SERVICE

The Charles Schwab Corp. ousted its chief executive yesterday and said that its chairman and founder, Charles R. Schwab, 66, would return as chief as it tries to regain its footing in a shifting competitive landscape.

Schwab, the brokerage giant, also said its second-quarter earnings dropped 10 percent.

The company's ouster of CEO David S. Pottruck, who had worked there for 20 years, comes as Schwab is still struggling to define its place on Wall Street.

After expanding beyond its roots as a no-frills brokerage firm, Schwab has been losing business to full-service firms like Merrill Lynch & Co. Inc. on one end and low-commission online brokers like E*Trade and Ameritrade on the other.

"This means a serious restructuring of the company," said Richard Bove, an analyst with the independent research firm Hoefer & Arnett. "Whatever strategy Mr. Pottruck put in place clearly isn't working."

Schwab's stock has tumbled from $50 a share in April 1999 to close at $8.85 yesterday, up 55 cents. Some analysts have speculated that Schwab could be a takeover candidate, but others discounted the possibility, saying its stock is overpriced even at these depressed levels.

At the height of the bull market, Schwab was briefly worth more than Merrill Lynch, with a market value of $25.5 billion, compared with $25.4 billion for Merrill. Now Merrill, at more than $47 billion, is worth almost four times as much as Schwab, which has a market value of $12 billion.

Pottruck said Schwab himself informed him yesterday of the board's decision and that it came as a surprise. But he said that he accepted it.

"Our performance since 2001 has been pretty lackluster," he said.

In a statement, Schwab said he had faith in "the strength of our franchise," but a spokesman said that he would not comment beyond the press release.

The discount brokerage firm that Schwab founded 30 years ago holds nearly $1 trillion in customer assets and has a market value of $12 billion. It still has one of the most recognized brands in the financial services industry, analysts said.

Schwab was one of the first companies to exploit low-cost online trading, but new competition in the 1990s led Schwab to broaden its business model to pursue wealthy investors. It acquired U.S. Trust in 2000 and more recently announced an initiative to offer advice to customers.

Last month, in an effort to revive sluggish trading by its clients, Schwab began offering steep trading discounts to customers with more than $1 million in their accounts, who can pay just $9.95 to buy or sell shares.

Meanwhile, those with less than $100,000 will pay three times as much - $29.95 for each trade - unless they make more than eight trades a quarter.

The strategy of going after the wealthier investors has yet to pay off, analysts said.

Schwab continues to bleed customers, losing 44,000 accounts in the second quarter. It now has a total of 7.5 million accounts. The number of trades has also declined, to an average of 127,00 a day in June from 215,000 a day in January.

For the second quarter, Schwab reported net income of $113 million, or 8 cents a share, down 10 percent from $126 million, or 9 cents a share, in the period a year earlier. Profit was down 30 percent from the first quarter. Revenue rose 9.2 percent, to $1.11 billion.

Mixed performance in the securities markets, as well as "continuing geopolitical uncertainties and concerns about rising interest rates" contributed to lackluster interest by Schwab clients in buying and selling stocks, Charles Schwab said.

He said yesterday that the company expected to cut $150 million to $200 million in costs, but some analysts were skeptical that the trims would have much effect.

The company has taken more than a dozen restructuring charges in just more than three years, Mark Constant, an analyst at Lehman Brothers, said in a report yesterday.

Schwab has reduced its work force by more than one-third through several rounds of layoffs and attrition since 2001.

The departure of Pottruck, 55, ends a long and at times rocky partnership between Schwab, who exudes calm, and the more hot-headed Pottruck, who played football and was a champion wrestler at the University of Pennsylvania.

Pottruck joined the Schwab firm 20 years ago after working at the Shearson brokerage firm under Sanford I. Weill, the acclaimed deal maker who built Citigroup.

Pottruck owns more than 6 million shares worth more than $50 million.

Schwab is still the company's biggest shareholder, with a stake worth more than $2 billion.

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