(Bloomberg) — Morgan Stanley agreed to buy discount brokerage E*Trade Financial Corp. for $13 billion, pushing further into the retail market with its biggest acquisition since the financial crisis.
The all-stock takeover adds E*Trade’s $360 billion of client assets to Morgan Stanley’s $2.7 trillion, the companies said Thursday in a statement. Morgan Stanley also gets E*Trade’s direct-to-consumer and digital capabilities to complement its full-service, advisory-focused brokerage.
“E*Trade represents an extraordinary growth opportunity for our wealth-management business and a leap forward in our wealth-management strategy,” Chief Executive Officer James Gorman said in the statement. “This continues the decade-long transition of our firm to a more balance-sheet-light business mix, emphasizing more durable sources of revenue.”
The retail-brokerage industry is being reshaped by price wars and consolidation. In early October, Charles Schwab Corp. eliminated commissions for U.S. stock trading, forcing other brokerages to follow suit and sweeping away an important revenue stream.
The following month, Schwab agreed to buy rival TD Ameritrade Holding Corp. for about $26 billion and create a mega-firm with $5 trillion in assets, forcing smaller brokerages like E*Trade to contend with a much more formidable competitor.
“It’s a pretty hefty price,” Alison Williams, an analyst at Bloomberg Intelligence, said on Bloomberg Television. “This is consistent with Morgan Stanley’s strategy” to dive deeper into the mass-affluent market.
Shares of Morgan Stanley slumped 3.6% to $54.31 at 8 a.m. in early trading in New York. E*Trade surged 25% to $56.
Gorman has been emphasizing Morgan Stanley’s wealth-management powerhouse, and purchasing E*Trade helps him add less-wealthy clients than its traditional customers. The New York-based company has lost some business to the retail brokerages in recent years as those firms invested heavily in their web platforms.
For Morgan Stanley, the deal “deepens the ‘safe’ wealth-management franchise — rich in fees and stability,” credit analyst David Havens at Imperial Capital wrote in a note to clients. “It reduces reliance on the more mercurial trading and markets businesses.”
Stockholders in E*Trade, which posted worse-than-expected earnings last month, will receive 1.0432 Morgan Stanley shares for each of their shares, valued at $58.74 based on Wednesday’s closing price.
–With assistance from Annie Massa and Lananh Nguyen.
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