Why Morgan Stanley Is Buying E*TRADE For $13 Billion

By Amit Chowdhry ● February 20, 2020
  • Morgan Stanley and E*TRADE Financial Corporation have entered into a definitive agreement under which Morgan Stanley will acquire E*TRADE in an all-stock transaction valued at approximately $13 billion

Morgan Stanley and E*TRADE Financial Corporation have entered into a definitive agreement under which Morgan Stanley will acquire E*TRADE in an all-stock transaction valued at approximately $13 billion. And under the terms of the agreement, E*TRADE stockholders will receive 1.0432 Morgan Stanley shares for each E*TRADE share — which represents per share consideration of $58.74 based on the closing price of Morgan Stanley common stock on February 19, 2020.

The combination of the companies will significantly increase the scale and breadth of Morgan Stanley’s Wealth Management franchise and it positions Morgan Stanley to be an industry leader in Wealth Management across all channels and wealth segments. E*TRADE now has over 5.2 million client accounts with over $360 billion of retail client assets, adding to Morgan Stanley’s existing 3 million client relationships and $2.7 trillion of client assets.

And Morgan Stanley’s full-service, advisor-driven model — coupled with E*TRADE’s direct-to-consumer and digital capabilities — will allow the combined business to have best-in-class product and service offerings to support the full spectrum of wealth.

“E*TRADE represents an extraordinary growth opportunity for our Wealth Management business and a leap forward in our Wealth Management strategy. The combination adds an iconic brand in the direct-to-consumer channel to our leading advisor-driven model, while also creating a premier Workplace Wealth provider for corporations and their employees. E*TRADE’s products, innovation in technology, and established brand will help position Morgan Stanley as a top player across all three channels: Financial Advisory, Self-Directed, and Workplace,” said James Gorman, Chairman and CEO of Morgan Stanley. “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.”

This transaction will create a leading player in Workplace Wealth, combining E*TRADE’s U.S. stock plan business with Shareworks by Morgan Stanley, a provider of public stock plan administration and private cap table management solutions. And this combination will enable Morgan Stanley to accelerate initiatives aimed at enhancing the workplace offering through online brokerage and digital banking capabilities, providing a significantly enhanced client experience.

“Since we created the digital brokerage category nearly 40 years ago, E*TRADE has consistently disrupted the status quo and delivered cutting-edge tools and services to investors, traders, and stock plan administrators,” added Michael Pizzi, Chief Executive Officer of E*TRADE. “By joining Morgan Stanley, we will be able to take our combined offering to the next level and deliver an even more comprehensive suite of wealth management capabilities. Bringing E*TRADE’s brand and offerings under the Morgan Stanley umbrella creates a truly exciting wealth management value proposition and enables our collective team to serve a far wider spectrum of clients.”

E*TRADE has been a pioneer in the digital brokerage and banking space for nearly 40 years. And E*TRADE’s hallmarked, consumer-facing technology platforms will complement Morgan Stanley’s leading advisor-facing technology. Plus E*TRADE also provides a full suite of digital banking services, including direct integration with brokerage accounts, checking and high-yield savings accounts, significantly accelerating Morgan Stanley’s digital banking efforts. This transaction adds approximately $56 billion of low-cost deposits — which will provide significant funding benefits to Morgan Stanley.

This transaction provides significant upside potential for shareholders of both Morgan Stanley and E*TRADE. And shareholders from both companies will benefit from potential cost savings estimated at approximately $400 million from maximizing efficiencies of technology infrastructure, optimizing shared corporate services and combining the bank entities as well as potential funding synergies of approximately $150 million from optimizing E*TRADE’s approximate $56 billion of deposits. Plus Morgan Stanley will have enhanced technology and service capabilities to capture a larger portion of the estimated approximate $7.3 trillion of combined current customer assets held away, which will drive significant revenue opportunities.

Through the acquisition, Morgan Stanley will be better positioned to generate attractive financial returns through increased scale, improved efficiency, higher margins, stronger returns on tangible common equity, and long-term earnings accretion.

Morgan Stanley is expecting the acquisition to be accretive once fully phased-in estimated cost and funding synergies are realized. And Morgan Stanley will maintain its strong capital position with the firm’s common equity tier 1 ratio estimated to increase by over 30bps at closing. The transaction is expected to increase the firm’s return on tangible common equity by over 100bps with fully phased-in cost and funding synergies and improve Wealth Management’s pre-tax profit margin to over 30%.

This acquisition is subject to customary closing conditions, including regulatory approvals and approval by E*TRADE shareholders and is expected to close in the fourth quarter of 2020.