News of E*TRADE Acquisition by Morgan Stanley Raises Anti-Trust Stakes

One source says the discount brokerage industry of the previous decade is being “merged away,” and that this latest M&A transaction could raise anti-trust scrutiny on other ongoing deals.

News emerged Thursday that Morgan Stanley and E*TRADE Financial Corp. have entered into a definitive agreement under which Morgan Stanley will acquire E*TRADE in an all-stock transaction valued at approximately $13 billion.

Under the terms of the agreement, E*TRADE stockholders will receive 1.0432 Morgan Stanley shares for each E*TRADE share, which, according to the firms, represents per share consideration of $58.74, based on the closing price of Morgan Stanley common stock on February 19.

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The announcement of this sizable and strategically significant acquisition comes after a record 2019 and a busy beginning to 2020 for financial services industry merger and acquisition (M&A) activity. Several important registered investment adviser (RIA)-focused transactions have already played out this year, while the biggest early 2020 M&A news (at least in terms of assets in motion) has been the acquisition of Legg Mason by Franklin Templeton—a move that will create a combined $1.5 trillion firm. 

Should this latest acquisition receive regulatory approval, the combination will significantly increase the scale and breadth of Morgan Stanley’s wealth management business. The firm’s leadership says the acquisition will position Morgan Stanley “to be an industry leader in wealth management across all channels and wealth segments.”

Strategic Perspective

Though its assets under management (AUM) are not massive ($360 billion) compared with some of the largest financial services providers, E*TRADE boasts more than 5.2 million brokerage client accounts, adding to Morgan Stanley’s existing 3 million client relationships and $2.7 trillion of client assets. Importantly, E*TRADE’s solutions and services are targeted to the mass market, meaning Morgan Stanley will be able to combine its full-service, adviser-driven model with E*TRADE’s direct-to-consumer and digital capabilities.

In a statement published Thursday, James Gorman, chairman and CEO of Morgan Stanley, says the E*TRADE acquisition represents an “extraordinary growth opportunity” for the firm’s 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 adviser-driven model, while also creating a premier workplace wealth provider for corporations and their employees,” Gorman says.

Sharing some preliminary commentary on the news, Rob Foregger, co-founder of Next Capital, observes that, for decades, the large private banks and wirehouse brokers have focused on high and ultra-high net worth customers only.

“What these white-glove institutions failed to understand was the mass market and mass affluent customers of today are the high net worth customers of tomorrow,” Foregger suggests. “Separately, the acquisition of E*TRADE by Morgan Stanley will create even more antitrust scrutiny on the TD Ameritrade-Schwab pending acquisition. Said another way, the discount brokerage industry as we know it has been merged away.”

As Foregger points out, important context for this news comes from the fact that, back in November 2019, the Charles Schwab Corp. and TD Ameritrade Holding Corp. announced their entrance into a definitive agreement for Schwab to acquire TD Ameritrade in a similar all-stock transaction. That deal is moving forward, but not without a measure of antitrust scrutiny from regulators as well as from within the industry itself. At the beginning of 2020, an independent Securities and Exchange Commission (SEC) registered wealth management firm called BlackCrown filed a civil antitrust action to prevent the combination of Charles Schwab and TD Ameritrade, but the case has since been summarily dismissed without prejudice on a technical issue.

The complaint, which is free to be corrected and refiled, argues that the secession of competition between TD Ameritrade and Charles Schwab will harm consumers and independent financial advisers. The plaintiffs argue that TD Ameritrade’s custodian services and technology are the only competitive alternatives to Charles Schwab for independent wealth management firms with smaller assets under management. It remains to be seen what the industry and regulatory reaction will be to the E*TRADE acquisition news.

More Details from Morgan Stanley

Other technical details included in Morgan Stanley’s acquisition announcement include that Mike Pizzi, CEO of E*TRADE, will join Morgan Stanley and will continue to run the E*TRADE business. In addition, Morgan Stanley will “invite one of E*TRADE’s independent directors to join our board,” Gorman says.

The transaction will combine 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. Firm leadership says this combination will enable Morgan Stanley to accelerate initiatives aimed at enhancing the workplace offering through online brokerage and digital banking capabilities, with the goal of providing a significantly enhanced client experience.

In terms of its own business interest, Morgan Stanley says, the acquisition marks a continuation of a decadelong effort to rebalance the firm’s portfolio of businesses so that a greater percentage of revenues and income are derived “from balance sheet-light and more durable sources of revenues.”

Upon integration, the combined wealth and investment management businesses will contribute approximately 57% of the firm’s pre-tax profits, “excluding potential synergies,” compared to only approximately 26% in 2010. The announcement projects that 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.”

Delta Air Lines Must Face Lawsuit Over Pension Payments

Retirees sued for denial of benefits, claiming Delta was wrong to offset their pension payments by a workers' compensation settlement they received.

A federal judge has denied dismissal of a lawsuit in which five former employees of Delta Air Lines allege Delta and its administrative committee improperly reduced their pension benefits from the Northwest Airlines Pension Plan for Contract Employees.

According to the court order, while employed by Delta, the plaintiffs suffered workplace injuries and filed claims for workers’ compensation benefits under Minnesota law. Delta settled these claims, paying each plaintiff a single lump sum. The plaintiffs have since retired and begun to receive their pensions. Citing a provision of the plan that requires Delta to offset pensions by the amount of other income-replacement benefits, Delta has reduced each plaintiff’s monthly pension by an amount calculated in his workers’ compensation settlement agreement.

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Relevant points in the case include that although the agreements calculated the settlement amount from each plaintiff’s potential entitlement to permanent total disability benefits, not all the plaintiffs claimed they qualified for permanent total disability. The settlement agreements were structured to take into consideration the plaintiffs’ potential entitlement to disability benefits under the Social Security Act, which provides Social Security Disability Insurance (SSDI) to qualified individuals.

Also, Delta notified each plaintiff that it was reducing his monthly pension benefit “to account for workers’ compensation benefits paid to [him] due to loss of wages with respect to a period of time after age 65.”

In her order, U.S. District Judge Joan N. Ericksen of the U.S. District Court for the District of Minnesota noted that the 8th U.S. Circuit Court of Appeals assesses five factors when deciding whether an Employee Retirement Income Security Act (ERISA) administrator interpreted a plan reasonably: (1) whether the interpretation was consistent with the goals of the plan, (2) whether the interpretation renders any language of the plan meaningless or internally inconsistent, (3) whether the interpretation conflicts with the substantive and procedural requirements of ERISA, (4) whether the words at issue were interpreted consistently, and (5) whether the interpretation is contrary to the clear language of the plan.

The committee argued that because the lump sums “represent” a monthly payment for the rest of each plaintiff’s life, they are equivalent to retirement income. For example, in plaintiff Leighton’s settlement agreement, his lump sum of $52,000 “represents” an amount of $225.81 per month for the rest of his life. The committee determined that it should deduct $225.81 per month to avoid Leighton receiving both his pension and that additional income each month. The committee performed a similar reduction for all five plaintiffs.

Ericksen said one problem with this reasoning is that the plaintiffs agreed to a single payment, not an income stream that would supplement their pension. In other words, they are not receiving a monthly workers’ compensation entitlement in addition to their monthly pension. She pointed out that the plaintiffs’ entitlement to workers’ compensation actually was never determined because the parties settled without stipulating to liability.

In addition, Ericksen found that the settlement calculations do not reflect the type of workers’ compensation entitlement claimed by each plaintiff. For example, although Leighton only claimed to be entitled to “temporary partial disability,” the stipulation calculated his settlement based on his potential entitlement to “permanent total disability.” She noted that had the calculation reflected his claim, it would have calculated the payments based on his potential entitlement to temporary partial disability. “This mismatch between the payment calculation and the underlying claim suggests that the calculation was made for some purpose other than to create a periodic workers’ compensation entitlement,” she wrote in her order.

Ericksen found that the stipulations made a monthly calculation to account for SSDI payment offsets and to maximize the plaintiffs’ pre-retirement SSDI income. They did not unfairly supplement the plaintiffs’ monthly pensions. Therefore, the committee’s decision to deduct the “represented” monthly payment did not support the plan’s goal of preventing duplicative retirement income. Instead, it reduced the plaintiffs’ pensions by an amount calculated to accommodate SSDI benefits.

Regarding the second factor in the 8th Circuit’s assessment, Ericksen said the committee’s interpretation of the plan renders the term “periodic” meaningless. The plan defines workers’ compensation benefits as “any periodic benefit payable.” The committee argues that because the one-time lump-sum payment settles a claim for a periodic benefit, that one-time payment is also periodic. “Under this reading, any settlement for a workers’ compensation claim would be periodic, making the phrase ‘periodic benefits payable’ identical to ‘benefits payable’ and rendering the word ‘periodic’ meaningless. This factor weighs in favor of plaintiffs,” Ericksen wrote in her order.

She did find that nothing in the committee’s interpretation appears to conflict with the substantive or procedural requirements of ERISA. The statute allows employers to determine what, if any, pension benefits they offer and to offset pension amounts by other income streams. An offset is valid under ERISA if it is authorized by the plan. Therefore, she said this factor weighs in favor of the defendants.

Ericksen found the fourth factor also weighed in favor of the defendants. Based on the administrative record, the committee and Delta appear to have consistently interpreted the plan language to require an offset for lump-sum workers’ compensation settlement payments.

However, she found the committee’s interpretation violates the clear language of the plan by concluding that a settlement payment is the same as a payable workers’ compensation benefit. The committee defined payable as something “that may, can or must be paid,” and argued that because Delta paid the settlement, the underlying workers’ compensation benefit was something that “can” be paid. Despite this assertion, a payment made to settle a legal claim is not the same relief as the payment Delta would have owed had the plaintiffs ultimately succeeded in their workers’ compensation actions.

“Because Delta challenged plaintiffs’ workers’ compensation claims and the parties stipulated to the dismissal of those claims, the underlying benefit was never ‘payable.’ … Nothing in the plan contemplates workers’ compensation settlements and nothing in the stipulations contemplates the pension plan. This mutual silence suggests that nothing in the clear language of either document supported the committee’s conclusion. Therefore, this factor weighs in favor of plaintiffs,” Ericksen wrote.

Based on the record before the court, Ericksen concluded that the committee did not reasonably interpret the plan and denied the defendants’ motion with respect to the plaintiffs’ ERISA Section 502(a)(1)(B) denial of benefits claim.

However, she agreed with the defendants’ argument that the plaintiffs’ ERISA Section 502(a)(3) claim for equitable relief should be dismissed because it is duplicative of their claim for benefits. Ericksen noted that ERISA Section 502(a)(3) permits actions against fiduciaries who breach their fiduciary duties, and although the plaintiffs may not ultimately obtain duplicate recoveries under both Section 502(a)(1)(B) and (a)(3), they can plead alternate theories of liability under both provisions. “Breach of fiduciary duty and wrongful denial of benefits are distinct causes of action so a plaintiff may pursue both under ERISA,” she said.

The plaintiffs allege that the committee denied their claims because it consulted with the Workers’ Compensation Department, a party alleged to have an interest adverse to participants. But Ericksen found that this allegation fails to state a claim for breach of fiduciary duty because the plan and federal regulations require the committee to apply the plan provisions consistently to similarly situated claimants. In order to fulfill that obligation, the committee had to communicate with the department that offsets employee pensions to learn about its past practices. The committee also had a fiduciary obligation to follow these plan requirements. “While it is theoretically possible that the committee made its decision for the purpose of putting Delta’s financial interests over the interests of the beneficiaries, plaintiffs failed to plead facts that support such an inference. Therefore, plaintiffs failed to state a claim for breach of fiduciary duty,” Ericksen wrote. She dismissed the plaintiffs’ ERISA claim for equitable relief.

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