This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at https://www.nytimes.com/2020/02/20/business/dealbook/morgan-stanley-etrade.html

The article has changed 8 times. There is an RSS feed of changes available.

Version 3 Version 4
Blue Chip Morgan Stanley to Buy Discount Broker E-Trade Morgan Stanley to Buy E-Trade, Linking Wall Street and Main Street
(about 4 hours later)
Morgan Stanley announced on Thursday that it would buy E-Trade, the online discount brokerage, for about $13 billion, in the biggest takeover by a major American lender since the 2008 global financial crisis. Morgan Stanley is betting its future on Main Street.
The deal would give Morgan Stanley — long one of Wall Street’s blue-chip names, whose asset management business caters to the wealthy — a big share of the market for online trading, an additional 5.2 million customer accounts and $360 billion in assets. The Wall Street giant moved further from its investment banking origins on Thursday with an agreement to buy the discount brokerage E-Trade for about $13 billion, the biggest takeover by a major American lender since the 2008 global financial crisis.
The deal highlights the increasing convergence of Wall Street and Main Street: Elite bastions of corporate finance are increasingly seeking to cater to customers with smaller pocketbooks, and online brokerages that once hoped to overthrow traditional trading houses are instead suffering from a price war that has slashed their profits. The addition of E-Trade would allow Morgan Stanley to tap into a new source of revenue: the smaller-volume trades of the country’s so-called mass affluent, people who are wealthy enough to have some savings but not rich enough to buy into hedge funds or seek out a money manager. If it goes through, the deal will put Morgan Stanley, which does not have retail bank branches to draw in new asset-management customers, on firmer footing with competitors like Bank of America and Wells Fargo.
It also reflects Morgan Stanley’s strategy of focusing on asset management rather than investment banking and high-stakes trading, betting on steady fees over bigger paydays and bigger risks. It would also give Morgan Stanley a big share of the market for online trading, an additional 5.2 million customer accounts and $360 billion in assets.
Under James P. Gorman, Morgan Stanley’s chief executive for a decade, the firm has increasingly de-emphasized jet-setting mergers bankers and aggressive bond trading, preferring the predictable and less costly business of wealth management. Morgan Stanley’s chief executive, James P. Gorman, said the merger would disrupt neither E-Trade clients nor Morgan Stanley customers, but ultimately result in more services for all.
Before Thursday, Mr. Gorman’s most transformative deal at Morgan Stanley was its acquisition of Smith Barney’s retail brokerage in 2012. The deal highlights the increasing convergence of Wall Street and Main Street: Elite bastions of corporate finance are seeking to cater to customers with smaller pocketbooks, and online brokerages that once hoped to overthrow traditional trading houses are instead suffering from a price war that has slashed their profits.
“This continues the decade-long transition of our firm to a more balance-sheet-light business mix, emphasizing more durable sources of revenue,” Mr. Gorman said in a statement. It also reflects a continuing shift in strategy for Morgan Stanley, which long relied on fees from high-finance services like mergers, stock offerings and massive trading desks but has lately embraced steady fees over bigger paydays and bigger risks.
If the deal goes through — it needs the approval of E-Trade shareholders and regulators — more than half of Morgan Stanley’s pretax profits would come from wealth and investment management, compared with 26 percent a decade ago. Under Mr. Gorman, who has led the bank for a decade, Morgan Stanley has de-emphasized the businesses of jet-setting investment bankers and aggressive Manhattan traders, preferring the predictable and less costly realm of wealth management. It’s a strategy playing out all along Wall Street: In the dozen years since the start of the financial crisis, major financial firms from Credit Suisse to Goldman Sachs have embraced what are considered lower-risk business lines.
Before the deal, Morgan Stanley’s $2.7 trillion in assets were largely tied to big companies and wealthy individuals. “This continues the decade-long transition of our firm to a more balance-sheet-light business mix, emphasizing more durable sources of revenue,” said Mr. Gorman, whose most transformative deal at Morgan Stanley before Thursday was its acquisition of Smith Barney’s retail brokerage in 2012.
The move will expand the bank’s access to well-heeled but not superrich investors — known in the trade as the mass-affluent segment — a sought-after group estimated to encompass more than 20 million households in the United States. E-Trade was an enticing target: It has struggled as brokerages slashed fees in a fight that peaked last fall when Charles Schwab eliminated fees for the trading of stocks and exchange-trade funds, and later agreed to buy TD Ameritrade for $26 billion.
In addition to capturing the trading business that E-Trade brings, Morgan Stanley could use the brokerage as the vehicle for delivering other products and services, such as shares of initial public offerings it has underwritten. Michael McTamney, who researches banks for the ratings agency DBRS Morningstar, said the deal accelerated Morgan Stanley’s growth plans. The bank already had a strong high-net-worth client base, he said, and now “they’ll be able to bring in this next generation of wealth via the E-Trade platform.”
If the deal goes through — it needs the approval of E-Trade shareholders and regulators — more than half of Morgan Stanley’s pretax profits will come from wealth and investment management, compared with 26 percent a decade ago.
Morgan Stanley’s $2.7 trillion in assets are largely tied to big companies and wealthy individuals. The E-Trade deal would expand its access to the comparatively well heeled, a group that encompasses more than 20 million households in the United States.
But Morgan Stanley could face a challenge luring this sort of investor toward its higher-touch investment management services.
Many E-Trade customers manage their own investments because of their intense distaste for the old-fashioned brokerage business. Others are hobbyists, trading a chunk of their retirement portfolios or some mad money. Both types have benefited greatly from decades of price wars that have made it possible for customers to pay nothing to maintain a brokerage account. Morgan Stanley will raise those fees at its peril.
But the addition of E-Trade offers another way to make money from those customers. Morgan Stanley could use the brokerage as the vehicle for delivering other products and services, such as shares of initial public offerings it has underwritten.
In Mr. Gorman’s words, the combination would unite Morgan Stanley’s “full-service, adviser-driven model” with E-Trade’s “direct-to-consumer and digital capabilities.”In Mr. Gorman’s words, the combination would unite Morgan Stanley’s “full-service, adviser-driven model” with E-Trade’s “direct-to-consumer and digital capabilities.”
Michael McTamney, who researches banks for the ratings agency DBRS Morningstar, said the deal accelerates Morgan Stanley’s growth plans. The bank already had a strong high-net-worth client base, he said, and now “they’ll be able to bring in this next generation of wealth via the E-Trade platform.” Morgan Stanley is betting that regulators in Washington will approve what is perhaps the most consequential acquisition by a so-called systemically important American bank — the too-big-to-fail variety of financial institution — since 2008.
The deal would not be Morgan Stanley’s first with a retail stock brokerage. It merged with Dean Witter Reynolds two decades ago, only for the marriage to founder amid a clash between Morgan Stanley’s Wall Street aristocrats and Dean Witter’s more down-market brokers.
Morgan Stanley’s traditional rival, Goldman Sachs, has also sought to court Main Street, in a different way. Goldman created a retail-focused lending arm, named Marcus, in 2016 and partnered with Apple last year to offer a credit card.
Last month, Goldman said that it intended to grow its retail deposit base to $125 billion, and its consumer loan and card balance to $20 billion, over the next five years.
Morgan Stanley’s approach appears to have won over investors more than Goldman’s has, at least based on the Wall Street scoreboard of stock prices. Shares in Morgan Stanley have climbed nearly 33 percent over the past 12 months, while those in Goldman have risen about 19 percent.
Bigger rivals have focused on this space as well. Late last year, JPMorgan Chase — already known for its enormous banking operations in both the consumer and the institutional areas — established a new platform that is meant to combine financial advisory services within its bank branches with wealth-management and online brokerage offerings.
And Bank of America, whose acquisition of Merrill Lynch during the financial crisis made it a heavyweight in the wealth-management business, has moved to court less-wealthy clients as well.
E-Trade has struggled amid a price war among brokerages, begun in earnest last fall when Charles Schwab eliminated fees for the trading of stocks and exchange-trade funds. Schwab later agreed to buy TD Ameritrade for $26 billion.
In striking Thursday’s deal, Morgan Stanley is betting that regulators in Washington will approve what is perhaps the most consequential acquisition by a systemically important American bank since the financial crisis.
Under the Obama administration, officials at the Federal Reserve fretted about the nation’s biggest banks growing through mergers. Daniel Tarullo, a former Fed governor, said in a 2012 speech that the central bank should have a “strong, but not irrebuttable, presumption of denial” for takeovers by America’s banking titans.Under the Obama administration, officials at the Federal Reserve fretted about the nation’s biggest banks growing through mergers. Daniel Tarullo, a former Fed governor, said in a 2012 speech that the central bank should have a “strong, but not irrebuttable, presumption of denial” for takeovers by America’s banking titans.
But the Fed has become more industry friendly during the Trump administration, particularly with the addition of officials like Randal K. Quarles, the central bank’s vice chairman. The central bank recently approved the combination of BB&T and SunTrust, paving the way for the creation of the sixth-largest U.S. commercial bank. But the Fed has become more industry friendly during the Trump administration, particularly with the addition of officials like Vice Chairman Randal K. Quarles, a former bank lawyer who is helping reassess the rules put in place after the financial crisis. The central bank recently approved the combination of BB&T and SunTrust, paving the way for the creation of the sixth-largest U.S. commercial bank.
In some ways, Morgan Stanley’s acquisition of E-Trade could look attractive to regulators from a financial stability perspective: The deal would infuse the Wall Street bank with stable deposits and reliable revenue streams. But it will also make Morgan Stanley even more of a behemoth. The acquisition could look attractive to regulators from a financial stability perspective: The deal would infuse the Wall Street bank with stable deposits and reliable revenue streams. But it will also make Morgan Stanley more of a behemoth.
Morgan Stanley doubtless hopes an E-Trade deal goes more smoothly than a past effort to pull in retail clients. Its merger with Dean Witter Reynolds two decades ago foundered amid a clash between Morgan Stanley’s Wall Street aristocrats and Dean Witter’s more down-market brokers. Since then, however, the bank has been steadily shifting toward asset management — one of a number of approaches major banks have been trying to court Main Street.
Morgan Stanley’s traditional rival, Goldman Sachs, created a retail-focused lending arm, Marcus, in 2016 and teamed up with Apple last year to offer a credit card. Last month, Goldman said it intended to expand its retail deposit base to $125 billion, and its consumer loan and card balance to $20 billion, over the next five years.
Investors seem to be more taken with Morgan Stanley’s continuing shift than with Goldman’s, at least based on the Wall Street scoreboard of stock prices. Shares in Morgan Stanley have climbed nearly 33 percent over the past 12 months, while those in Goldman have risen about 19 percent.
Late last year, JPMorgan Chase — already known for its enormous banking operations in both the consumer and the institutional areas — established a new platform that is meant to combine financial advisory services within its bank branches with wealth-management and online brokerage offerings.
And Bank of America, whose acquisition of Merrill Lynch during the financial crisis made it a heavyweight in the wealth-management business, has moved to court less-wealthy clients as well.
Under the terms of the deal announced on Thursday, Morgan Stanley will buy E-Trade using its own stock. Its offer is worth about $58.74 a share as of Wednesday’s market close, a 30 percent premium on the value of the online brokerage’s shares.Under the terms of the deal announced on Thursday, Morgan Stanley will buy E-Trade using its own stock. Its offer is worth about $58.74 a share as of Wednesday’s market close, a 30 percent premium on the value of the online brokerage’s shares.
E-Trade’s chief executive, Michael Pizzi, would continue to run the business upon the deal’s closing, which is expected by year’s end.E-Trade’s chief executive, Michael Pizzi, would continue to run the business upon the deal’s closing, which is expected by year’s end.
Jeanna Smialek and Ron Lieber contributed reporting.