By Ciara Linnane, MarketWatch
Morgan Stanley said Thursday that is acquiring discount brokerage E-Trade Financial Corp. in an all-stock deal valued at $13 billion that is the biggest for a major U.S. bank since the 2008 financial crisis.
The news prompted talk of Morgan Stanley’s status as a systemically important financial institution that is subject to Financial Stability Oversight Council rules, an entity established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. That legislation was put in place to prevent another crisis that would threaten the health of the U.S. financial system and sought to stop banks from growing “too big to fail.”
President Donald Trump has rolled back some of the Dodd-Frank regulations, raising concerns that banks would re-engage in the kind of risky behavior that required major government bailouts in 2008 and 2009.
The deal “illustrates the increasingly powerful drive toward ever-greater concentration of market power in the financial industry,” said Cornell Law Professor Saule Omarova, who specializes in financial regulation and banking law.
Morgan Stanley (NYS:MS) will pay 1.0432 of its shares for each E-Trade share (NAS:ETFC) , equal to $58.74 based on its closing price Feb. 19. The deal “will significantly increase the scale and breadth of Morgan Stanley’s Wealth Management franchise, and positions Morgan Stanley to be an industry leader in Wealth Management across all channels and wealth segments,” Morgan Stanley said in a statement.
E-Trade has more than 5.2 million client accounts with over $360 billion of retail client assets, adding to Morgan’s existing 3 million client relationships and $2.7 trillion of client assets. The deal is expected to close in the fourth quarter.
“Importantly, the acquisition marks a continuation of Morgan Stanley’s decade-long effort to rebalance the firm’s portfolio of businesses so that a greater percentage of firm revenues and income are derived from balance sheet light and more durable sources of revenues,” said the statement. “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 move comes just months after E-Trade rivals Charles Schwab Corp. and TD Ameritrade Holding Corp. announced that they were merging in a $26 billion deal, just weeks after Schwab shook up the sector with the news that it was cutting trading fees for its customers to zero. The other discount brokerages were forced to follow suit, and the deal prompted speculation that more would follow as shrinking fees from commissions would eat into revenue.
In addition to its discount brokerage services, E-Trade manages stock awarded to employees in the form of options from employers, which it strives to move over to brokerage accounts as soon as they vest.
Professor Omarova from Cornell said the deal illustrates how much more lucrative managing ordinary people’s money has become than it used to be, with technology now offering potentially limitless opportunities to leverage access to personal data and other resources.
“Scale and a related ability to run a major investment platform is quickly becoming the key ingredient of success in the asset management sector,” she said.
Morgan Stanley Chief Executive James Gorman told the Wall Street Journal on Thursday that he has been interested in an E-Trade deal since 2002, when he was working at Merrill Lynch. The executive reached out again in 2007 but talks broke down as E-Trade was grappling with a portfolio of home-equity loans that was souring.
Talks were revived in December, he said after the Schwab/TD Ameritrade merger.
E-Trade shares soared 23%, while Morgan Stanley shares fell 3.9%. Morgan Stanley shares have gained 28% in the last 12 months, while the S&P 500 (S&P:SPX) has gained 21%.