Morgan Stanley to acquire E*TRADE in $13bn deal

Maria Nikolova

The all-stock transaction valued at approximately $13 billion is set to close in the fourth quarter of 2020.

Morgan Stanley (NYSE:MS) and E*TRADE Financial Corporation (NASDAQ:ETFC) today announce they have entered into a definitive agreement under which Morgan Stanley will acquire online brokerage E*TRADE.

This is an all-stock transaction valued at approximately $13 billion. Under the terms of the agreement, E*TRADE stockholders will receive 1.0432 Morgan Stanley shares for each E*TRADE share, which represents per share consideration of $58.74 based on the closing price of Morgan Stanley common stock on February 19, 2020.

The transaction is poised to create a leading player in Workplace Wealth, combining E*TRADE’s U.S. stock plan business with Shareworks by Morgan Stanley. This combination will enable Morgan Stanley to accelerate initiatives aimed at enhancing the workplace offering through online brokerage and digital banking capabilities, providing a significantly enhanced client experience.

E*TRADE also provides a full suite of digital banking services, including direct integration with brokerage accounts, checking and high-yield savings accounts, significantly accelerating Morgan Stanley’s digital banking efforts. The transaction adds approximately $56 billion of low-cost deposits, which will provide substantial funding benefits to Morgan Stanley.

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. 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 transaction provides significant upside potential for shareholders of both Morgan Stanley and E*TRADE. Shareholders from both companies will benefit from potential cost savings estimated at approximately $400 million from maximizing efficiencies of technology infrastructure, optimizing shared corporate services and combining the bank entities, as well as potential funding synergies of approximately $150 million from optimizing E*TRADE’s approximate $56 billion of deposits.

In addition, Morgan Stanley will have enhanced technology and service capabilities to capture a larger portion of the estimated approximate $7.3 trillion of combined current customer assets held away, which will drive significant revenue opportunities.

Morgan Stanley expects the acquisition to be accretive once fully phased-in estimated cost and funding synergies are realized. Morgan Stanley will maintain its strong capital position, with the Firm’s common equity tier 1 ratio estimated to increase by over 30bps at closing. The transaction is expected to increase the Firm’s return on tangible common equity by more than 100bps with fully phased-in cost and funding synergies and improve Wealth Management’s pre-tax profit margin to over 30%.

The acquisition, which is subject to customary closing conditions, including regulatory approvals and approval by E*TRADE shareholders, is set to close in the fourth quarter of 2020.

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