Morgan Stanley Buys Discount Broker E-Trade For $13bln.

Morgan Stanley Buys Discount Broker E-Trade For $13bln.
February 21, 2020

 

Wall Street investment bank Morgan Stanley (NYSE: MS) is taking over E*TRADE Financial Corporation (Nasdaq: ETFC) in an all-stock deal worth $13 billion. The broking sector is going through a period of consolidation and huge changes in business models leading to a sharp decline in commissions to virtually zero in 2019. Following the announcement of the takeover, shares of Morgan Stanley dropped 4.55% or $2.56 to $53.75. Likewise, E-Trade shares soared by 21.81% or $9.80 to $54.73 per share.

The New York-based Morgan Stanley will shell out $58.74 per share in stock to acquire E-Trade. The combined entity will hold $3.10 trillion in client assets. Specifically, E-Trade, with 5.20 million trading accounts and more than $360 billion in client assets, will add to Morgan Stanley’s 3 million accounts and $2.7 trillion in client assets.

Considering the solid deposit base, E-Trade was a lucrative target for Morgan Stanley. E-Trade receives roughly $56 billion client deposits per year. Morgan Stanley had been struggling to raise deposits to finance its high net worth clients. The bank acknowledged that the deposits would result in “significant funding benefits to Morgan Stanley.” Morgan Stanley anticipates gaining nearly $400 million in expense synergies through the merger.

Following the completion of the deal, the CEO of E-Trade Mike Pizzi will join Morgan Stanley and manage the business. Analysts on Wall Street anticipate Morgan Stanley to keep E-Trade’s famous brand name.

Morgan Stanley Chairman and CEO James Gorman explained how the acquisition of E-trade would enable Morgan Stanley to achieve stable growth. “E-TRADE represents an extraordinary growth opportunity for our Wealth Management business and a leap forward in our Wealth Management strategy. 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.”

Devin Ryan, JMP Securities managing director of equity research, explained how Morgan Stanley could benefit from the stock plan customers of E-trade.“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.”

The acquisition deal, anticipated to be completed in 4Q 2020, succeeds last year’s takeover of TD Ameritrade by Charles Schwab in an all-stock deal worth $26 billion. Notably, during that period, many analysts prophesied that E-Trade could turn out to be the next to be taken over by some major broking firm as the discount brokerage sector is grappling with margin pressures caused due to zero commission trading. Last October, Fidelity, and E-trade were left with no other option but to drop online trading fees after Schwab became the first top broking firm to introduce zero commission trading scheme.

Devin Ryan, JMP Securities managing director of equity research, believes that E-Trade shareholders have received a just deal. Morgan Stanley is buying E-Trade’s shares at about a 40% premium to the stock price before the Schwab-TD Ameritrade deal was announced.

Ryan believes that the acquisition has been made with long-term plans in mind. He said, “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.”

Interestingly, the takeover deal will probably put small brokers such as Interactive Brokers and even Silicon Valley start-up brokerage firm Robinhood under pressure. It can be remembered that Robinhood started offering free stock trading in 2013.

The acquisition deal is expected to turn the stock of Morgan Stanley bullish in the days ahead.

The historical price chart indicates that the stock of Morgan Stanley has broken the resistance at 52. The stock is also trading above its 50-day moving average. Additionally, the stochastic oscillator is also in the bullish region. Therefore, the stock is anticipated to move up in the days ahead.

ms - technical analysis - 21st Feb 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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