By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Acquirer: Morgan Stanley (MS)
- Target: E*TRADE Financial Corporation (ET)
- Industry: Investment Banks, Brokers & Capital Markets
- Estimated value: $13B
- Financing: All-stock
- Announcement Date: 20/02/2020
- Acquirer Advisors: Morgan Stanley
- Target Advisors: J.P. Morgan
On Friday (17/07/2020) shareholders of E*TRADE approved the company’s pending acquisition by Morgan Stanley. Over 99% of votes were cast in favour of the deal.
Morgan Stanley will exchange 1.0432 shares of its common stock for each outstanding share of ET, valuing it at $13B, a 34% premium to the share price 2 days before the announcement in February. MS will also exchange preferred stock worth $700M.
MS CEO, James Gorman, has seen ET as potential acquisition target for nearly two decades.
“For a long time, I’ve believed these channels will converge. We’re not messing around. We’ve got access to many millions of clients, and we get there immediately with a world-class player.”~James Gorman
The deal is subject to closing conditions, including the remaining regulatory approvals and is expected to close in Q4 2020.
COMPANY DETAILS (Morgan Stanley):
Morgan Stanley is an American multinational investment bank and financial services company. With offices in more than 42 countries the firm’s clients include corporations, governments, institutions, and individuals. In 2018 MS ranked 67th in the Fortune 500 list of the largest US corporations by total revenue.
- Founded in: 1931
- Headquartered in: New York, United States
- CEO: James P. Gorman
- Number of Employees: 60,431
- Market Cap: $79.7B
- EV: $198.6B
- LTM Revenue: $43.8B
- LTM EBITDA: $14.9B
- EV/ LTM Revenue: 4.53x
- EV/ LTM EBITDA: 13.33x
The company operates through Institutional Securities, Wealth Management, and Investment Management segments.
- Institutional Securities
This segment provides investment banking, sales and trading, lending and other services to corporations, governments, financial institutions, and high net worth clients.
Investment banking services consist of capital raising and financial advisory services, such as debt and equity underwriting, as well as advice on M&A, restructurings, real estate and project finance.
Sales and trading includes sales, prime brokerage and market-making activities in equity and fixed income products, such as FX and commodities.
Lending activities include origination of corporate loans and commercial real estate loans.
- Wealth Management
This segment provides an array of financial services and solutions to individual investors and SMEs such as investment advisory services and financial and wealth planning.
- Investment Management
This segment provides a range of investment strategies and products that span geographies, asset classes, and public and private markets to a group of clients across institutional and intermediary channels. Strategies and products, which are offered through various investment vehicles, include equity, fixed income and alternative products.
COMPANY DETAILS (E*TRADE Financial Corporation)
E*TRADE Financial Corporation is a financial services company providing brokerage products and services for traders, investors, stock plan administrators and registered investment advisors.
The company provides these services through its digital platforms and network of licensed customer service representatives and financial consultants, through the phone, by email and online through 2 national financial centers, and in-person at 30 regional financial centers across the US. The company also operates savings banks with the primary purpose of improving the value of deposits generated through its brokerage business.
- Founded in: 1982
- Headquartered in: Arlington, Virginia, United States
- CEO: Michael A. Pizzi
- Number of Employees: 4,000
- Market Cap: $11.55B
- EV: $13.23B
- LTM Revenue: $2.9B
- LTM EBITDA: $1.2B
- EV/ LTM Revenue: 4.56x
- EV/ LTM EBITDA: 11.03x
ET offers a range of products and services to its clients, such as trading, investing, banking and cash management, corporate services and advisory services.
- Trading
ET delivers automated trade order and execution services, offering its customers a range of investment products. The company also offers margin accounts, enabling customers to borrow against their securities. They also offer a lending program, which allows customers to earn income on certain securities when they permit the company to lend these.
- Investing
The firm helps investors address their long-term investing needs through managed products and asset allocation models. For example, clients can invest in dedicated portfolios and fixed income portfolios.
The company also offers guidance through a team of licensed financial consultants and Chartered Retirement Planning Counselors. Customers can also receive portfolio reviews and personalized investment recommendations.
- Banking and Cash Management
Among other features, ET Bank’s customers can transfer to and from accounts elsewhere for free and have access to debit cards with ATM fee refunds, online and mobile bill pay, and mobile check deposits. The company also offers a line of credit.
STRATEGIC RATIONALE
WEALTH MANAGEMENT
As result of the acquisition MS is significantly expanding its footprint in the wealth management business. The combined company is expected to control about $3.1TN in client assets across 8.2M retail client relationships and accounts, although they plan to keep the two brands separate.
Part of the wealth management expansion that is expected to occur will come from the stock-plan business. Through that business, ET manages the stock that employees receive from their firms. MS offers a similar business known as Shareworks by Morgan Stanley.
CLIENTELE
E*TRADE will enable MS’s wealth management business to expand into a category of less-wealthy customers than the clientele base it used to serve.
SYNERGIES
MS expects the deal to result in cost synergies of about $400M, mainly as a result of combining the two companies’ bank and corporate service entities and technology upgrades.
RISKS AND UNCERTAINTIES
There has been a long-standing speculation across Wall Street about E*TRADE.
In 2019, the company followed its competitors in removing commission fees, making them more reliant on wealth management revenues. It cost them around $75M in lost revenues. Moreover, in the same year, ET’s rival, Charles Schwab Corporation, agreed to acquire TD Ameritrade Holding Corporation for $26B, increasing competitive pressures on ET.
OUR VIEW
The acquisition of ET by MS was inevitable. The level of competitive pressures for ET was rising exponentially since the removal of commission fees and the partnership with a bigger player was to be expected. Given that, the synergy effects which are expected to be seen by 2023 and the expansion of MS’s client base, the deal seems promising, benefiting both the MS and ET.
