Morgan Stanley MS is acquiring E*Trade ETFC for $13 billion in an all-stock transaction marking the first big deal made by a major bank since the financial crisis in 2008.
The discount brokerage industry in which E*Trade operates has been evolving rapidly with Charles Schwab SCHW initiating the commission-free frenzy that every other brokerage was forced to adapt, in October of last year. Schwab’s announced its $26 billion acquisition of TD Ameritrade AMTD in November. The combined company would create an online brokerage giant that instilled fear in shareholders of smaller brokerages like E*Trade and Interactive Brokers IBKR, which may not be able to attain the same margins without the added scale.
E*Trade shares have been struggling over the last couple of years, with investors hesitant to place their bets on a one-trick pony in an increasingly saturated space. This acquisition was great news for ETFC shareholders, and its shares soared roughly 25% following the announcement. MS fell just over 4% on the news.
Morgan Stanley’s savvy management team, headed by James Gorman, who nimbly lead MS out of the depths of the great recession, has driven the firm’s share price up almost 40% in the past 6 months. MS’s share price appreciation, combined with investor hesitation with E*Trade, created the opportunity Gorman had been waiting for, to swoop in and pick up this discount brokerage.
Gorman has slowly but surely been transitioning Morgan Stanley away from riskier operations like trading into more stable, reliable revenue drivers such as wealth management and loans. Morgan Stanley’s wealth management arm caters to primarily high net worth individuals, but adding E*Trade to the mix will substantially broaden their addressable market into the middle-class.
E*Trade will bring in 5 million new clients and $360 billion in assets, which Morgan Stanley will put to good use. There are some strong synergies to be realized in this merger that MS’s competent management team will be able to leverage.
Discount brokers are hitting an inflection point, and the industry’s top players are consolidating. Morgan Stanley’s move was unexpected by some, but E*Trade fits in the firm’s steps towards more reliable revenue streams.
MS’s share price drop today may have created a buying opportunity. The stock may still have more room to fall as worried investors exit positions, but I think this stock would make a robust long term play in your portfolio’s financial allocation.
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Interactive Brokers Group, Inc. (IBKR) : Free Stock Analysis Report
E*TRADE Financial Corporation (ETFC) : Free Stock Analysis Report
The Charles Schwab Corporation (SCHW) : Free Stock Analysis Report
Morgan Stanley (MS) : Free Stock Analysis Report
TD Ameritrade Holding Corporation (AMTD) : Free Stock Analysis Report
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