Morgan Stanley said on Thursday it would buy discount brokerage E*Trade Financial Corp. in a stock deal worth about US$13-billion, the biggest acquisition by a Wall Street bank since the 2008-09 financial crisis.
Part of a broader consolidation in the discount brokerage sector, the move will add breadth to Morgan Stanley’s wealth management unit, a business that chief executive officer James Gorman has been trying to build out to insulate the bank from weak periods for trading and investment banking.
Morgan Stanley’s main rival, Goldman Sachs Group Inc., has also been forging ahead with an upstart retail bank, while others including Bank of America Corp. and UBS are trying to focus on basic lending and wealth management services.
“The addition of E*Trade’s products and iconic brand will serve as a leap forward” for the bank, Mr. Gorman said on a call with analysts.
The deal reflects a more relaxed regulatory mood under U.S. President Donald Trump’s administration, which has helped unleash other big-ticket takeovers in the financial sector.
Big banks have been emboldened to do deals that would have been tricky for the Wall Street titans under former president Barack Obama’s administration.
In March last year, U.S. regional bank Fifth Third Bancorp’s purchase of smaller rival MB Financial Inc for US$4.7-billion got a nod from regulators. Then came approval for a US$28-billion marriage of BB&T Corp. and SunTrust.
“We believe federal regulators are likely to approve Morgan Stanley’s acquisition of E*Trade though the review could take longer than realized as we expect the Federal Reserve to conduct a systemic risk review,” said Jaret Seiberg of Cowen Washington Research Group.
Mr. Gorman sounded confident that the deal would go through without any regulatory hurdles.
“We wouldn’t be entering into this [the deal] if we didn’t think from a regulatory perspective this would be viewed favourably,” Mr. Gorman said.
The U.S. Federal Reserve did not immediately comment on the deal.
Banking deals in particular had languished after the financial crisis as strict capital and liquidity rules were imposed on lenders with more than US$50-billion in assets, making it unattractive for mid-size firms to acquire more assets.
THIRD TIME LUCKY FOR GORMAN
In an interview with CNBC on Thursday, Mr. Gorman said he had attempted to buy E*Trade twice – in 2002 when he was at Merrill Lynch and then again in 2007 at Morgan Stanley – before reinitiating talks late last year and finally sealing the deal.
Since taking over a decade ago, Mr. Gorman has pulled off multiple big acquisitions. He orchestrated the bank’s takeover of Smith Barney, making wealth management the cornerstone of his plan to stabilize revenue.
E*Trade, which became popular nearly two decades ago with commercials that blasted financial advisers for high fees, had been under the gun as the online trading space became more competitive with increased cutthroat pricing.
Revenue growth at the brokerage, as with rivals, has taken a hit in recent years from the emergence of digital upstarts called robo advisers, falling commissions and lower interest rates, prompting consolidation in the sector.
Late last year, E*Trade’s biggest rival Charles Schwab Corp agreed to buy TD Ameritrade Holding Corp. for US$26-billion.
Morgan Stanley will get E*Trade’s more than 5.2 million client accounts and US$360-billion of retail client assets, and the brokerage’s CEO, Mike Pizzi, will continue to run the business following the merger.
E*Trade shareholders will get 1.0432 Morgan Stanley shares for each share as part of the deal. That translates to US$58.74 a share – a premium of 30.7 per cent to the last closing price of E*Trade shares.
The deal is expected to close in the fourth quarter of 2020.