Morgan Stanley to buy E-Trade in $13bn deal

Morgan Stanley has agreed to buy financial services company E-Trade Financial Corp. in a $13bn all-share deal.

Under the terms of the agreement, E-Trade shareholders will receive 1.0432 MS shares for each of their shares. This represents a consideration per share of $58.74 based on the closing price of Morgan Stanley shares on Wednesday.

MS said the deal will "significantly" increase the scale and breadth of its wealth management franchise and position the company to be an industry leader in wealth management across all channels and wealth segments.

It noted that E-Trade has more than 5.2 million client accounts with over $360bn of retail client assets. This will add to Morgan Stanley’s existing 3 million client relationships and $2.7trn of client assets.

Morgan Stanley chairman and chief executive officer James Gorman said: "E-Trade represents an extraordinary growth opportunity for our 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 advisor-driven model, while also creating a premier workplace wealth provider for corporations and their employees.

"E-Trade’s products, innovation in technology, and established brand will help position Morgan Stanley as a top player across all three channels: financial advisory, self-directed, and workplace."

The deal, which is set to close in the fourth quarter, is expected to result in cost savings of about $400m, MS said.

At 1240 GMT, MS shares were down 4.2% in pre-market trade at $53.92, while E-Trade shares were up 6.2% at $47.71.

Olivetree Financial said this is as a largely complementary deal, which continues MS’s diversification away from investment banking and capitalises on their recent re-rating.

"That said, MS is still significantly lower rated than ETFC...so it will be challenging to make the economics work. MS has identified $400m cost savings and $150m of funding cost synergies, which both seem reasonable/conservative: equivalent to 25% of ETFC’s cost base versus our rule of thumb of 1/3 of the target in banking deals; 27 basis points of ETFC’s $56bn deposit base when they have a funding cost advantage over MS of more like 70 basis points.

"MS are also buying an extremely well-capitalised balance sheet and so additionally see a 30 basis points capital uplift, which we estimate is worth $1.2bn (1% of combined market cap). All-in we estimate the deal will be broadly earnings neutral and deliver a 10% return on investment - so positive strategically but not a slam-dunk financially."