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As big bank M&A heats up, Morgan Stanley will pay $13B for E-Trade

Morgan Stanley has agreed to acquire E-Trade for $13 billion in an effort to expand its client base beyond institutional investors.

Featured image via Justin Sullivan/Getty Images North America

 

Morgan Stanley declared Thursday that it has agreed to buy discount brokerage pioneer E-Trade for a whopping $13 billion—representing the priciest acquisition announced by a major US bank since 2008, according to PitchBook data, when regulators arranged a string of hasty mergers to rescue the financial system.

With the deal’s emergence, the online brokerage wars may have reached an apex. Trading commissions are out the window. Charles Schwab has gobbled up smaller rival TD Ameritrade. Now, America’s second-largest investment firm is plunging into the battle in a bid to further diversify its business.

“Wealth management and online brokerage are both relatively steady and relatively capital-light, especially in comparison to sales and trading operations,” said Morningstar equity analyst Michael Wong.

This diversification effort has fueled a consistent acceleration of M&A activity in the US financial services sector. Deal value hit a decade-peak in 2018, with about $289 billion worth of acquisitions in the space, according to PitchBook data. 2019 was in second place with deals totaling $230 billion.



The deal underlines the unsteadiness felt throughout the online discount brokerage arena since Charles Schwab bucked precedent by nixing commission fees in October. The move was widely seen as a way to edge out competition from zero-commission startups like Robinhood. Schwab’s competitors, including TD Ameritrade, Fidelity and E-Trade, swiftly followed suit.

Then in November, Schwab leveraged the uncertainty it had created to acquire TD Ameritrade in an all-stock deal worth some $26 billion. The resulting brokerage beast manages more than $5 trillion in assets. As a smaller industry player, E-Trade’s fate was called into question as investors struggled to see how it would compete.

Morgan Stanley has now swooped in, signaling its pursuit of Main Street retail investors who trade stocks non-professionally for their personal accounts, rather than for an organization. JP Morgan, Bank of America and Citibank maintain strong presences in the space, and all three already offer retail brokerage accounts. Goldman Sachs, Morgan Stanley’s most direct competitor, has recently pursued these investors with a digital banking initiative dubbed Marcus, which offers no-fee personal loans and other services.

E-Trade opens a door to this customer base. While Morgan Stanley brings more assets under management to the table ($2.7 trillion to E-Trade’s $360 billion-plus), E-Trade offers significantly more clients (5.2 million to Morgan Stanley’s 3 million). Those customers just tend to be relatively less-wealthy retail investors, rather than institutional investors with millions to spend on shares.

Given E-Trade’s strong employee stock management platform, the move will also bolster Morgan Stanley’s position in the workplace market, which includes 401k and employee stock plans, according to Wong. It’s not Morgan Stanley’s first incursion. In 2019, the firm purchased Solium Capital, which counts corporations like Instacart and Levi Strauss among its stock plan participants. Other players are taking note: Goldman Sachs purchased wealth management shop United Capital last year.

“If you have a relationship with one corporation that might have thousands of employees, you...now have relationships with thousands of people,” Wong said.

Regulators and stockholders willing, E-Trade has found refuge from the brokerage battle on Wall Street.

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    Eliza Haverstock was a PitchBook writer covering venture capital, startups, and private equity.

    A graduate of the University of Virginia where she majored in history and economics, she’s also a native of the Washington, DC, area. Previously, Eliza worked as a news editor for her college paper, The Cavalier Daily, and interned as an industrials reporter for Bloomberg in New York.
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