Recently, Morgan Stanley MS concluded the acquisition of E*TRADE Financial in an all-stock deal worth $13 billion and now holds $3.3 trillion in assets. Last week, the deal received regulatory approval from the Federal Reserve for completion.
The deal, which was announced this February, is likely to position Morgan Stanley as a leader in the Wealth Management industry across all channels and segments, with significant increase in the scale and breadth of its franchise.
Per James P. Gorman, chairman and chief executive officer of Morgan Stanley, "E*TRADE has built a best-in-class, direct-to-consumer digital channel and a strong brand over the past 38 years. The addition of their premier offering will provide enhanced capabilities to all our clients and Financial Advisors.”
Terms of the Deal
Per terms of the deal, each common shareholder of E*TRADE will get stock equivalent to 1.0432 of Morgan Stanley shares for every E*TRADE share held. This represents a per share value of $58.74 based on the closing price of Morgan Stanley common stock as of Feb 19, 2020.
Strategically, the combined entity will enhance through advanced technologies, innovative products and create a competitive edge with financial stability. Remarkably, on completion of the acquisition, online brokerage and digital banking services will enhance clients’ experience.
Michael Pizzi, CEO of E*TRADE, joined Morgan Stanley, looking after the E*TRADE business within Morgan Stanley and will co-lead the equity administration business. Moreover, one of E*TRADE’s independent directors is joining Morgan Stanley’s board.
Catering huge funding benefits to Morgan Stanley, the deal comes with around $56 billion of low-cost deposits. The acquisition move follows the bank’s efforts to record revenues from balance-sheet light and more lasting sources of revenues. Markedly, post integration, the combined wealth and investment management businesses are likely to contribute about 57% of the bank’s pre-tax profits, excluding potential synergies, above the 26% recorded in 2010.
Post combination, significant cost savings worth $400 million are anticipated, with the optimization of technology infrastructure and shared corporate services, along with funding synergies of $150 million from E*TRADE’s around $56 billion of deposits. In addition, $7.3 trillion of combined current customer assets will likely generate significant revenue opportunities.
Per Morgan Stanley, the acquisition is likely to be accretive, once the fully phased-in estimated cost and funding synergies are realized. Furthermore, the bank’s common equity tier 1 ratio is estimated to expand by more than 30 basis points (bps) on closure and augment its return on tangible common equity by more than 100 bps, with fully phased-in cost and funding synergies. Apart from this, Wealth Management’s pre-tax profit margin is expected to be up more than 30%.
Rating Action by Moody’s on Completion
Following the completion of the transaction, Moody's Investors Service, the rating arm of Moody’s Corporation MCO upgraded Morgan Stanley's long- and short-term ratings to A2 (senior unsecured)/Prime-1 from A3 (senior unsecured)/Prime-2. Also, the long-term ratings and assessments of the bank's principal U.S. bank subsidiary — Morgan Stanley Bank, N.A. (MSBNA) — was upgraded by one notch, including its deposit rating to Aa3 from A1, baseline credit assessment (BCA) to baa1 from baa2, and adjusted BCA to a3 from baa1. However, the rating outlook has been retained at ‘stable’.
"The acquisition of E*TRADE is another deliberative step in Morgan Stanley's clear and consistent strategy to shift its business mix towards generating recurring, profitable revenue-streams in wealth and investment management. These revenue-streams are generally more stable and of lower risk than the activities and exposures in Morgan Stanley's institutional securities' business segment," said Donald Robertson, Moody's senior vice president.
Morgan Stanley’s acquisition of E*Trade is in sync with its aim for transition toward “a more balance-sheet light business mix”, with diversified revenue sources. The deal was able to withstand the uncertainty surrounding the economy over the coronavirus pandemic.
Shares of Morgan Stanley have rallied 29.7%, over the past six months compared with 20.3% growth recorded by the industry.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Similar Moves by Peers
Consolidation in the finance sector seems to be a way forward amid heightened costs of regulatory compliance and increased investments in technology. The likelihood of a prolonged low rate environment is a concern as well. Thus, industry players are trying to strengthen profitability through strategic buyouts.
Last year, in a surprise move, Charles Schwab SCHW inked a deal to buy TD Ameritrade Holding AMTD for nearly $26 billion. Remarkably, the Schwab-TD Ameritrade combination will create a behemoth in the online brokerage space, with combined client assets worth more than $5 trillion and serving nearly 24 million brokerage accounts. The deal, likely to close this week, is estimated to result in substantial strategic benefits — earnings and cost synergies — for the combined entity.
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