Schwab will slash up to 13 percent of work force

The Associated Press
Friday March 23, 2001

SAN FRANCISCO — Concluding that the stock market’s technology craze was a fad, leading online brokerage Charles Schwab Corp. Thursday said it will jettison as many as 3,400 jobs – about 13 percent of its work force. 

In making the cuts, the San Francisco-based brokerage conceded that much of its recent prosperity stemmed from the dot-com mania that lured inexperienced investors into swapping stocks on the Internet as if they were buying lottery tickets at a convenience store. 

The giddiness has given way to gloom as the stocks of Internet start-ups and technology bellwethers have crashed. 

The past two years represented “a euphoria-led trading level that just isn’t going to return,” said Schwab President David Pottruck during a conference call. 

Charles Schwab, the company’s chairman and founder, was almost apologetic for allowing the brokerage to be swept up in the frenzy.  

As its trading volumes soared, the brokerage added 6,000 new jobs last year, increasing its staff by 30 percent to about 26,000 full-time workers. 

“We have come through a highly speculative technology bubble,” Schwab said. “Maybe I should have been a little more emphatic in understanding that this was a temporary phenomenon.” 

To make amends for the upcoming layoffs, Schwab and his wife are donating $10 million to create a fund that will pay up to $20,000 in tuition for the employees who lose their jobs.  

Schwab has an estimated $10 billion fortune, according to Forbes magazine’s most recent wealth survey. 

The company also is providing severance packages that will pay up to 10 months of salary, cover health insurance premiums and offer up to 1,000 stock options.  

Fired workers who return within 18 months will receive a $7,500 rehiring bonus. 

Even as its business suffered, Schwab had tried to avoid the layoffs by slashing management salaries, reducing bonuses and encouraging workers to take unpaid days off. 

Schwab’s problems aren’t isolated, industry analysts said. Most brokerages, particularly those that relied heavily on trades made over the Internet, are facing tough times as investors retreat from the plummeting stock market. 

Most other brokerages, though, are fooling themselves into believing that their businesses eventually will return to the glory days of 1999 and 2000, said industry analyst Mark Constant of Lehman Brothers. 

“Everyone wants to blame this on a blip in the market, but the reality is what happened the last couple years was a joke and we’re not going back to that kind of environment anytime soon,” Constant said. 

As the biggest Internet broker, Schwab has been particularly hard hit. 

In February, the brokerage’s average daily trades plunged by 31 percent from the prior year and fell 13 percent from the prior month. With trading commissions evaporating, the slowdown is taking a big bite out of the company’s profits. 

Besides announcing the layoffs, Schwab also warned that its first-quarter profits won’t meet expectations. 

The company said its profit will range between $88 million and $98 million, or 6 cents to 7 cents per share, a 66 percent decrease from last year. Excluding special charges, the company said its first-quarter profit will range between $110 million to $120 million, or 8 cents per share. Analysts previously expected the company to earn 13 cents per share. 

Schwab’s shares fell 70 cents to close at $15.20 Thursday on the New York Stock Exchange. The stock has lost nearly half its value so far this year. The company plans to buy back up to 20 million shares to boost its stock. 

The layoffs and other budget cuts are expected to save Schwab $40 million to $45 million beginning in the third quarter. Jobs left unfilled through employee attrition will save another $10 million in 2002. 

With trading volume in a slump, Schwab hopes to generate more income from advisory fees from customers looking for investment help amid the current market turbulence. 

Schwab customers have an average of $400,000 in assets, but only about $220,000 is in Schwab accounts, Pottruck said. The brokerage hopes to persuade customers to transfer more money into Schwab accounts by proving that it can dispense sound financial advice. Schwab is about to introduce a new advertising campaign emphasizing its advisory service. 

The big challenge will be convincing customers to pay fees for advice from a company known for its low-cost, do-it-yourself service, Constant said. 


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