Introduction
Wall Street Investment bank Morgan Stanley announced, on Feb 20th2020, the acquisition of E*TRADE for $13 billion – the biggest acquisition of a U.S. bank since the tough financial crisis of 2008. Certainly, Morgan Stanley will incredibly enhance client experience, but most importantly the company will have access to E*TRADE’s $56 billion in cash as deposits. The deal was closed with determination after the Charles Schwab-TD Ameritrade merger, consolidated by the decline in revenues of E*TRADE when Charles Schwab drove to zero the commission-based fee for all the brokerage accounts.
Morgan Stanley: Company Overview
Morgan Stanley is one of the world’s top investment banks and a financial institution founded in New York in 1935, by Henry Sturgis Morgan and Harold Stanley. This American transnational corporation was formed as a result of the Glass-Steagall Act that required American banks to separate their investment banking and commercial banking businesses. After this Act, J.P. Morgan decided to continue with commercial banking, whereas Henry S. Morgan and Harold Stanley, decided to leave the company and start a new one specializing in investment banking.
As of today, Morgan Stanley stands for one of the most important global investment banks worldwide and it is a member of the Fortune 500 list. The company has revenues of $41,41 bn (2019, a 3.3% increase YoY), pre-tax profits of $11.281 bn (2019), a $9.042 bn net income (2019), and 60,348 (2018) employees in more than 42 countries.
Morgan Stanley is organized into three business divisions:
- Institutional Securities: This segment includes capital raising, corporate lending, financial advisory for corporate and institutional investors. It is considered as the most profitable company’s segment as it produces revenues for $20.386 bn, and a pre-tax income of $5.5 bn.
- Wealth Management: This division provides various financial services and solutions to individuals, enterprises, and institutions, including brokerage, credit, investment advisory and wealth planning services. The division produced, in 2019, revenues for $17.737 bn, which are divided into Transactional, Asset management, Net Interest and Others, and a pre-tax income of $4.8bn.
- Investment Management: This segment provides asset management products and services to institutional and retail clients through intermediary channels. The business unit produced revenues for $3,763 bn, which are divided into Investments and Asset management, and a pre-tax income of $985 mm in 2019.
Between 1951 and 1961, Morgan Stanley was involved in a series of public financings. The company co-managed World Bank’s $50 million AAA-rated bonds, General Motor’s $300 million debt issue, IBM’s $231 million stock offering, and AT & T’s $250 million debt offering. In later years, it also served as underwriter in some of the largest tech IPOs, such as Netscape, Cisco, Broadcom, Groupon, Salesforce, Priceline, Compaq, and Google.
E*TRADE: Company overview
E*TRADE is one of the first financial corporations that offers an electronic trading platform to trade securities online, but it also supplies services for employee stock ownership plans, online banking, cash management services, and advisor services.
The company, founded in Palo Alto, California in 1982, under the name “TradePlus”, was a pioneer in the online trading business during the Brokerage Revolution in the 1980s, with the vision of taking online investment services to the next level by drastically cutting trading costs and making it accessible to everyone via portable devices. The company grew at a very rapid pace during the 1990s as PCs became more accessible to the public: this first growth phase culminated when the company decided to go public via an IPO (initial public offering) in 1996.
Nevertheless, E*TRADE was forced to expand its services when the dot-com bubble burst: this was the period in which E*TRADE began the transition into a multi-faceted financial services company.
Since then, the corporation expanded through acquisitions such as:
- Web Street Securities, an online brokerage firm in May 2001;
- Harrisdirect, which was its main rival in the online brokerage industry in August 2005;
- Brown & Company, an online brokerage service of JPMorgan Chase & Co, in October 2005;
- OptionsHouse, an online brokerage firm specialized in derivatives trading, in September 2016;
- Trust Company of America, an independent RIA custodian that provides trading services to registered investment advisors in October 2017;
- Gradifi, the industry leader in student loan repayment benefits in August 2019.
Thanks to all of these acquisitions, the company has strengthened its position in the online brokerage industry by diversifying its offerings as well,
Today, E*TRADE operates as a registered broker-dealer with federally chartered savings banks for the purpose of deposits generated through its brokerage business. It offers equity compensation plans, as well as student loan benefits to corporate clients, and it also provides investment advisory services through its RIA subsidiary. E*TRADE delivers those services through its advanced digital platforms and network of professional representatives and financial consultants, over the phone, by email and in-person in the US.
E*TRADE key financials as at December 31st, 2019:
- Revenues: $3.145bn (3.59% increase YoY) with 5Y CAGR: 31.01%;
- EBITDA margin: 49.83% (industry median of 32.4%);
- Profit margin: 30.4% (industry median of 16.9%);
- ROE: 14.6% (industry median of 13.7%).
Industry Overview:
The major trends that financial institutions are facing, in these last years, is a significant shift towards technology-driven software, digitalization, and consolidation within the sector.
Under this perspective, the deal, between Morgan Stanley and E*TRADE, perfectly represents both trends and underlines, as well as the importance for global banks to insulate from weak periods for trading and investment banking, by stabilizing revenues through other banking services, as Morgan Stanley is doing by boosting its Wealth Management unit. In fact, upon integration, the combined Wealth and Investment Management businesses will contribute approximately 57% of the firm’s pre-tax profits.
As to E*TRADE, revenues growth in the online brokerage sector has taken a hit in recent years from the emergence of digital upstarts called robo-advisers, falling commissions and lower interest rates, prompting consolidation in the sector. In fact, last year E*TRADE’s biggest rival, Charles Schwab, merged with TD Ameritrade in order to boost growth and reduce costs.
By analysing the Wealth Management sector, the shift of client’s demographics and preferences, as well as the flood of new digital offerings, is driving clients around the world to reconsider their wealth management relationship. The rapid change of digital innovation in wealth management is causing unexpected shifts in client engagement, and clients’ preferences for smart mobile apps are already eclipsing traditional channels, as shown in the graph.
Source: EY Wealth Management Outlook 2019
The increasing digitalization of wealth management activities, and the rise of self-service offerings, have made clients more empowered and more willing to switch providers or assets for value.
Furthermore, we have to add a more educated investor class, with self-directed investors who are seeing a steep growth. Wealth management firms are now recognizing that in today’s world the client’s experience is one of the most important factors which can define the competitiveness of digital offerings. In fact, 48% of E*TRADE’s customer base comprises self-directed investors, and 72% of millennials who describe themselves as “self-directed”.
By considering all these factors, this deal would diversify Morgan Stanley’s customer base, by complementing its base of delegators, who rely on financial advisors to make investment decisions for them, with more self-directed investors. Moreover, it would guarantee the access to the well-heeled, a group that encompasses more than 20 million households in the US.
To conclude, adding E*TRADE’s direct-to-consumer and digital capabilities to its full-service, advisor-driven model would provide Morgan Stanley a leading position in the three major channels of Wealth Management: Workplace Wealth, Financial Advisory and Self-directed investing.
Deal Rationale
The deal has several key drivers, together meant to broaden the Wealth Management division, provide cost and funding synergies, diversify the customer base and have a more balance sheet light business mixture. This acquisition will give Morgan Stanley the access to E*TRADE’s products, technology, brokerage customers, and low-cost retail deposits to fuel its lending business.
Morgan Stanley’s Wealth Management segment is already exceptional: $2.7Tn in assets under management tied to big companies and wealthy individuals, and more than 15,500 financial advisors. The acquisition of E*TRADE will give them access to less affluent clients, enabling them to diversify their customer base and serve different types of investors. By accessing these new clients, Morgan Stanley can distribute to them its products and services, such as shares of initial public offerings it underwrites and financial advisory services. In addition, Morgan Stanley will be able to expand its Wealth Management unit, becoming a full-service investment giant and a top player across all three segments: higher-end advisor-driven, lower-end self-directed, and workplace. The deal will bring 5.2m new client accounts with more than $360bn of retail client assets from E-Trade, that has to be added to Morgan Stanley’s existing 3 million client relationships and $2.7 trillion of client assets.
With regards to the workplace, Morgan Stanley has already a competitive business. However, the deal with E-Trade will make Morgan Stanley a primary workplace stock plan administrator by combining its $280bn stock plan balanced with the $300bn held by E-Trade’s equity edge platform. Thanks to this transaction, Morgan Stanley will have more than 4,000 corporate customers and $580bn of stock detained on behalf of their employees.
Besides, the transaction will provide significant advantages for the company in terms of cost and funding synergies. They will benefit from potential funding synergies that will contribute to a cut of Morgan Stanley’s funding costs by approximately $150m within two years, thanks to the $56bn in cash deposits from E-Trade customers.
Morgan Stanley will use the E*TRADE’s technological innovations, its digital presence and the big range of digital banking services, to enhance its workplace and to get a larger portion of the estimated $7.3Tn of customer assets held away, as the chairman and CEO James Gorman targeted. From maximizing efficiencies of technology infrastructure, improving shared corporate services and combining bank units, the company will benefit from potential cost savings, estimated $400m within three years.
The acquisition of E-Trade will consolidate Morgan Stanley’s decade-long strategy of focusing more on wealth management rather than investment banking and trading. Indeed, the combined wealth and investment management businesses will contribute around 57% of the firm’s pre-tax profits. This M&A will give the possibility to Morgan Stanley to deduce a new source of persistent revenue. At the same pace, the firm could make E*TRADE even more international, where the online brokerage firm has no wealth-management presence yet. In the fall of 2019, the Charles Schwab Corporation was the first leading brokerage to declare plans to go to zero commissions. E*TRADE was strongly affected by this initiation, as the company draws 17% of its revenues from commissions. Furthermore, after Charles Schwab declared the acquisition of TD Ameritrade, E*TRADE faced many other struggles. Therefore, E*TRADE and Morgan Stanley took turns deciding to join forces and lower costs
In conclusion, this acquisition will change Morgan Stanley, from a bank to a more engaging and broadened company that will extend its operations to a full-service advisor-driven services, direct-to-consumer brokerage capabilities. Besides, the same day Morgan Stanley announced the acquisition of E*TRADE, the online trading platform surged 25%.
Deal Structure
Morgan Stanley will acquire E*TRADE in an all stock deal. Morgan Stanley will buy all of the issued and outstanding common shares of E-Trade for $58.74 each. The price of $58.74 per share incorporates a premium of 30.7% to the previous closing price of E-Trade shares ($44.93), and a total valuation for the American online brokerage firm of $13bn. Under the terms of the deal announced Thursday 20th February, E-Trade shareholders will get 1.0432 Morgan Stanley shares for each share that they own in E*TRADE.
The transaction is still subject to the approval of E-Trade shareholders and regulators and it is expected to close in the fourth quarter of 2020.
The takeover reflects a more relaxed regulatory attitude under President Trump’s administration, and it will be the biggest takeover by a Wall Street bank since the 2008 financial crisis.
J.P. Morgan served as the lead financial adviser to E*TRADE. Skadden, Arps, Slate, Meagher & Flomis acting as E*TRADE’s legal advisor. Davis Polk & Wardwell is providing legal advice to Morgan Stanley.
Sources and References: Companies Financial Report, Financial Times, Thomson Reuters, Capgemini Report, EY Report, Nasdaq, CNBC, NYT, WSJ, Etna, Forbes, Leaders League, CFI, CRAIN, Il Sole 24 Ore.
To contact the authors:
Beatrice Bizzozero: Beatrice.bizzozero@studbocconi.it
Francesco De Benedittis: Francesco.debenedittis@studbocconi.it
Dietmar Del Vecchio: Dietmar.delvecchio@studbocconi.it
Andrea Donatello: Andrea.donatello@studbocconi.it
Andrea Zenoniani: Andrea.zenoniani@studbocconi.it
Bocconi Students M&A Circle 
You must be logged in to post a comment.