UPDATE: Schwab To Buy Windward For $150 Million, To Broaden ETF Push

Charles Schwab Corp. (SCHW) announced its first acquisition of a money manager in seven years, agreeing to buy Windward Investment Management Inc. to broaden its push into the rapidly growing exchange-traded fund market.

Schwab, the largest discount broker by market capitalization, said it would pay $150 million in cash and stock to purchase Windward, an investment advisory firm which it has provided custodial services to for the last 15 years.

For Schwab, the deal is an expansion of its plan to go on offense in late 2009. Like its peers, the San Francisco company has been hurt by low interest rates, which forced it to waive fees on some its money market funds so clients' yields wouldn't turn negative.

Since November, Schwab announced a push into ETFs and joined forces with J.P. Morgan Chase & Co. (JPM) to give its clients access to the banking giant's fixed-income securities. As of July 30, Schwab had $1.4 billion in eight proprietary ETFs and has launched three additional ones this month.

In an interview with Dow Jones Newswires, Bernie Clark, executive vice president for Charles Schwab Advisor Services, said, "We have seen advisers really embrace [ETFs] and the [Windward deal] gives us access to three unique strategies in an area that we think will be more broadly adopted."

ETFs, which trade like stocks, have gained in popularity over the past year as the investment tools track a particular index, sector, industry or even commodity.

Specific financial details of the deal weren't disclosed. Schwab said it expects the acquisition to add "modestly" to the bottom line during the first 12 months after the deal closes.

Boston-based Windward managed about $3.9 billion as of July 31 in three portfolios primarily made up of ETF securities. Schwab said Monday it had seen a 38% jump in ETF usage among its clients from June 2009 to June 2010, and it noted that a research firm estimates that ETFs will see a compound annual growth rate of 23% between 2010 and 2014.

When the deal closes, Windward's ETF-based investment portfolios will be available to individual investors through the Schwab platform.

Pursuing acquisitions is something of a rarity for Schwab, which is known as more of a strategic acquirer than some of its main rivals and it has been mostly focused on organic growth in recent years. The company last purchased a money manager in 2003, when it acquired State Street Corp.'s (STT) private asset management business. At that time, Schwab made the deal to enhance its ultra-high-net-worth business--U.S. Trust Corp.--which it later sold to Bank of America Corp. (BAC).

"When we see an opportunity--and in this particular case, we think it enhances our retail and advisory offering--then that becomes something we go after," Clark said.

Shares of Schwab recently traded down 8 cents at $13.14, after falling to a 52-week low of $13.03 on Monday. The stock has fallen 30% so far this year.

-By Brett Philbin, Dow Jones Newswires; 212-416-2173; brett.philbin@dowjones.com

(Nathan Becker contributed to this report.)

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