In what will be the largest deal in the global banking since the global economic crisis of 2008, the online brokerage E-Trade Financial has been announced to be acquired by Morgan Stanley in a deal worth $13bn.
According to analysts, this acquisition clearly marks a departure of the strategy and focus of the Wall Street banks from their old model of focusing on the business of wealth management in which the banks acted as brokers and charged commissions for trading on behalf of a relatively small number of high net worth individuals and the corporate and institutional investors to a new business model that will cater to the needs of millions of smaller individual investors.
A press release issued by the companies showed that there is a pool of a total of 5.2 million client accounts with E-Trade which amounts to a total of more than $360bn in retail assets of the clients that it manages and these huge numbers will add on to the existing large client base of Morgan Stanley – which is at million client accounts a total client asset under its management worth $2.7tn.
Therefore a total of close to $3.1tn in client assets will be the combined value after the deal for which the investment bank will pay $58.74 a share in stock for E-Trade.
According to a report published in the Wall Street Journal, which broke news of the sale, the deal would “combine a Wall Street firm in the late innings of a decade-long turnaround with a discount broker built on the backs of dot-com day traders.”
In an interview to the news paper, Morgan Stanley’s CEO, James Gorman, said: “This isn’t about legacy-building; it’s about getting Morgan Stanley ready for prime time.”
The $26bn purchase of TD Ameritrade by Charles Schwab last year reflected the beginning of a period of consolidation in the discount brokerage industry which has been under pressure because of zero commission trading.
The acquisition of E-Trade will give Morgan Stanley access to about $56bn in yearly E-Trade customer deposits that will provide “significant funding benefits”, said the bank which was founded by John Pierpoint Morgan, an icon of the Gilded Age often credited with saving the US economy from collapse during the Panic of 1907.
“There’s a longer-term strategic play here around the digital opportunity and acquiring new corporate service customers and getting a higher percentage of their wallet over time,” Devin Ryan, JMP Securities managing director of equity research, said
“E-trade has nearly 2 million corporate stock plan customers and so this strategically widens the potential opportunity for Morgan Stanley to convert those customers,” Ryan added.
But in terms of assets, this deal will still leave E-Trade smaller than Fidelity, Vanguard and Schwab. Further, this deal is also likely to put pressure on other smaller brokerage companies to join hands and tie up with rivals because of the continued consolidation in the in the investment management business.
(Adapted form TheGuardian.com)