Morgan Stanley to buy E-Trade for $13 billion in latest deal for online brokerage industry

Wall Street investment bank Morgan Stanley will acquire E-Trade for $13 billion, the companies said on Thursday, the latest in a consolidation wave for the brokerage industry.

Morgan Stanley will pay $58.74 a share in stock for E-Trade in a deal bringing together $3.1 trillion in client assets. Morgan Stanley shares fell more than 4% in premarket trading. E-Trade shares jumped about 23% to $55.16 per share.

“E*TRADE represents an extraordinary growth opportunity for our Wealth Management business and a leap forward in our Wealth Management strategy,” said James Gorman, Chairman and CEO of Morgan Stanley, in a press release. “In addition, this continues the decade-long transition of our Firm to a more balance sheet light business mix, emphasizing more durable sources of revenue.”

The deal, which is expected to close in the fourth quarter of 2020, follows last year’s $26 billion all-stock purchase of TD Ameritrade by Charles Schwab. At the time of that deal, analysts speculated E-Trade may be next to find a partner as the discount brokerage industry faces increasing margin pressures from zero commission trading. After Schwab became the first major player to drop online commission fees last October, competitors were forced to follow with Fidelity and E-trade making similar announcements shortly thereafter.

“I think it’s a fair price to E-trade shareholders and for Morgan Stanley there’s a longer term strategic play here around the digital opportunity and acquiring new corporate service customers and getting a higher percentage of their wallet over time,” JMP Securities managing director of equity research Devin Ryan said.

Analysts on Wall Street said Morgan Stanley is likely to keep E-Trade strong brand name.

“MS was attracted to ETFC’s digital D2C broker offering including its corporate services platform and low cost deposits,” wrote a Credit Suisse analyst about the combo.

E-Trade makes an attractive acquisition target for a bank that is pushing into consumer finance, given E-Trade’s very strong deposit base, which generates about $56 billion in deposits each year, analysts have pointed out. The deposits business will provide “significant funding benefits to Morgan Stanley,” the bank said.

“They both have leading corporate stock plan businesses and a big part of Morgan Stanley’s growth initiative for the year in wealth management is converting those customers to Morgan Stanley wealth management customers. E-trade has nearly 2 million corporate stock plan customers and so this strategically widens the potential opportunity for Morgan Stanley to convert those customers,” said Ryan.

Morgan Stanley expects to realize about $400 million in expense synergies, which is about 25% of Piper Sandler’s 2020 expense estimate for E-Trade. This compared to the 63% of expenses that Schwab exoects to remove from the 2020 TD Ameritrade cost base.

“We suspect that as a non eBroker acquirer, MS may not be able to remove costs such as marketing and certain platform costs that an in-industry player could be capable of,” Piper Sandler analyst Richard Repetto said in a note to clients.

E-trade, with 5.2 million client accounts and over $360 billion of retail client assets, will be adding to Morgan Stanley’s 3 million client accounts and $2.7 trillion of client assets, the release said.

Compared to its peers, the combined company will still trail Fidelity, Vanguard and Schwab in terms of client assets.

CEO of E-Trade Mike Pizzi will be joining Morgan Stanley and continue to run the business and integration within the Morgan Stanley franchise.

The deal will likely pressure smaller brokers like Interactive Brokers, as well as Silicon Valley start-up Robinhood which kick-started free stock trading in 2013.

Source: CNBC

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