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Morgan Stanley (MS) to Acquire E*TRADE (ETFC) for $13 Billion

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Morgan Stanley MS recently entered into an all-stock acquisition deal with Arlington, VA-based E*TRADE Financial ETFC, per which the former will acquire the latter for $13 billion. Post completion, Morgan Stanley will be well positioned as a leader in the Wealth Management industry across all channels and wealth segments, with significant increase in the scale and breadth of its franchise.

E*TRADE’s more-than 5.2-million client accounts and $360 billion of retail client assets will augment Morgan Stanley’s current 3-million client relationships and $2.7 trillion of client assets. Thus, the combined entity will have client assets worth $3.1 trillion, 8.2 million retail client relationships and accounts, and 4.6 million stock-plan participants.

Morgan Stanley will be able to serve clients with superior products and services catering the advisor-driven model, combined with E*TRADE’s direct-to-consumer and digital processes. Therefore, Morgan Stanley will be transitioned to a more balance-sheet light business mix, with strong and diversified revenue sources.

“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,” Gorman further noted on this.

However, the deal awaits certain regulatory approvals and customary approvals by shareholders of E*TRADE. The transaction is anticipated to close in the final quarter of 2020.

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 per share value of $58.74 based on the closing price of Morgan Stanley common stock as on 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.

Mike Pizzi, CEO of E*TRADE, will join Morgan Stanley, looking after the E*TRADE business within Morgan Stanley and head the ongoing integration process. Moreover, one of E*TRADE’s independent directors is likely to join Morgan Stanley’s board.

Financial Benefits

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. Notably, 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 is expected with 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 is likely to generate significant revenue opportunities.

Per Morgan Stanley, the acquisition is likely to be accretive once 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 the bank’s 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%.

Similar Moves

Recently, Franklin BEN, operating as Franklin Templeton, entered into an all-cash acquisition deal with Baltimore, MD-based Legg Mason (LM), per which the former will acquire the latter for $50.00 per share of common stock. The combined entity will operate under the name of Franklin Templeton, headquartered in San Mateo.

Tennessee-based First Horizon National Corporation FHN also entered into a stock-cash acquisition deal with Lafayette, LA-based IBERIABANK Corporation (IBKC), per which the former will merge with the latter in an all-stock merger of equals. The combined entity will operate under the name of First Horizon headquartered in Memphis, TN, and maintain its operating presence in all the existing markets of both companies.

Bottom Line

In the current scenario, banks are moving toward consolidation to dodge the heightened costs of regulatory compliance and increased investments in technology, in a bid to be competitive. Furthermore, the current interest-rate scenario and volatile trading activities have taken a toll on banks’ profitability.

Therefore, such moves have caused investors to become optimistic about banks’ future growth prospects. Notably, shares of Morgan Stanley and E*TRADE rallied 9.2% and 29.2%, respectively, over the last three months, as compared with 7.4% growth recorded by the industry.

Currently, Morgan Stanley carries a Zacks Rank #2 (Buy), while E*TRADE carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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