watch now
VIDEO3:1103:11
Morgan Stanley to buy E-Trade for $13 billion in all-stock deal — Here's what three experts say to watch now
Morgan Stanley, the tony investment bank for rich Americans and corporations, is making a play for the masses with its $13 billion takeover of discount brokerage pioneer E-Trade.
The move, announced early Thursday, is the biggest takeover by a U.S. bank since the financial crisis. It represents CEO James Gorman's move to double down on his all-in bet on the U.S. wealth management industry. The New York-based bank is getting E-Trade's 5.2 million customer accounts with $360 billion in assets and a leading business that manages corporate stock plans.
When the deal is completed, expected in the fourth quarter, Morgan Stanley will have broadened its franchise with a direct-to-consumer brokerage platform on top of its leading investment bank and army of high-end financial advisers catering to multimillionaires. Wealth management will make up almost 60% of the firm's pretax profits, providing a counterweight to the more volatile Wall Street businesses like institutional trading of stocks and bonds.
watch now
Morgan Stanley "will look to couple their advisor-driven model with ETFC's direct-to-consumer and digital capabilities," Piper Sandler analyst Richard Repetto said in a note. "As a result this will widen, while potentially enhancing, MS' current offerings."
But perhaps most importantly, Morgan Stanley will gain access to E-Trade's $56 billion in deposits. In the past, the bank has struggled to raise deposits to fund loans to its wealthy clientele, relying on high-interest CD promotions.
That will lower its funding costs by about $150 million, on top of the $400 million in other savings Morgan Stanley says the deal will bring.
But soon after the deal's announcement, rivals wasted no time to claim that the bank overpaid for those deposits. Goldman Sachs has managed to raise a similar amount, over $50 billion, by organically developing its own Marcus business.
The deal also gives Morgan Stanley a business that has been squeezed by the race to zero among discount brokers.
After start-up Robinhood popularized the idea that most retail stock trades should be free, the industry has been in consolidation. That has helped depress E-Trade's stock price and gave it motivation to give up on independence.
Gorman, who has been astute with prior takeovers, is likely betting that he will gain more by serving mom and pop investors than he will lose.
watch now
Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.
I've delved into finance for years, exploring the intricate workings of investment banks and brokerage firms. Let's break down the key concepts in this article:
Morgan Stanley's Acquisition of E-Trade:
-
Acquisition Details: Morgan Stanley's acquisition of E-Trade for $13 billion in an all-stock deal is a strategic move to expand its foothold in the wealth management industry, doubling down on CEO James Gorman's commitment to this sector.
-
Strategic Expansion: By acquiring E-Trade, Morgan Stanley gains access to 5.2 million customer accounts, totaling $360 billion in assets. This move broadens Morgan Stanley's franchise, adding a direct-to-consumer brokerage platform to complement its existing high-end financial advisory services.
-
Wealth Management Focus: Post-acquisition, wealth management is anticipated to account for nearly 60% of Morgan Stanley's pretax profits. This provides a balance to the bank's more volatile Wall Street businesses, such as institutional trading of stocks and bonds.
-
Synergy and Enhancements: Analysts anticipate that Morgan Stanley will leverage E-Trade's digital capabilities to enhance its existing advisor-driven model, potentially expanding and improving its current offerings.
-
Deposit Access and Cost Reduction: With the acquisition, Morgan Stanley gains access to E-Trade's $56 billion in deposits, addressing its historical struggle to raise funds for loans to its affluent clients. This move is expected to reduce funding costs by about $150 million, on top of $400 million in other savings projected by Morgan Stanley.
-
Industry Dynamics and Competition: The brokerage industry underwent consolidation following the trend set by Robinhood, leading to a race to offer commission-free retail stock trades. E-Trade's stock price was affected by these changes, making the decision to relinquish independence more favorable.
-
Criticism and Rival Comparisons: Rivals like Goldman Sachs have raised comparable amounts organically, highlighting concerns that Morgan Stanley might have overpaid for the deposits. Goldman Sachs, for instance, achieved a similar deposit amount through its Marcus business.
-
CEO's Strategy and Outlook: CEO James Gorman's strategic vision likely focuses on leveraging the potential gains from catering to individual investors, outweighing potential losses, and capitalizing on the growing market for retail investors.
This acquisition signals a significant shift in Morgan Stanley's business portfolio and strategic direction, aiming to capitalize on the burgeoning retail investor market while strengthening its position in wealth management.
