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.

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.”