Morgan Stanley will acquire E-Trade for $13 bln

Morgan Stanley will buy E-Trade for $13 billion to boost its wealth management business.

Ivana Freitas reported the news for CNBC:

Morgan Stanley announced Thursday that it is buying E-Trade for $13 billion in an all-stock deal.

Here’s what Morgan Stanley’s CEO and three others are watching now.

James Gorman, chief executive of Morgan Stanley, shared the goal behind the acquisition.

“The rationale is that this is sort of the next step in our journey. It’s got implications for the wealth management business, first and foremost. There’s been a convergence of technology across all platforms and this gives us access to both the workplace direct as well as our core financial advisory which is unchanged … and then for Morgan Stanley this gives us more ballast.”

Jim Cramer, CNBC host of “Mad Money,” said E-Trade was left with no choice than to make this deal.

“Go back to when Schwab bought Ameritrade, people expected that the next thing that would happen would be E-Trade. And then it became a narrative where E-Trade’s not doing well enough for everybody to buy, they’re just not growing. I think if you’re [CEO] Gorman you can consolidate, I guess some people would say fire people, but it is incredible to see a franchise like E-Trade that people didn’t think was worth that much after a second look, after Ameritrade was bought, and then why does Gorman come and do that even though people were passing up on it initially? I think the answer is that Robinhood made it so that E-Trade had no choice.”

CNN’s Paul R. La Monica wrote:

Shares of E-Trade (ETFC) rose 24% in early trading on the news while Morgan Stanley (MS) fell more than 4%. The deal comes nearly three months after E-Trade rivals Charles Schwab (SCHW) and TD Ameritrade (AMTD) announced a $26 billion merger.

Discount brokers had to adapt their business models after just about every company in the industry eliminated commissions on online trades last year. That killed off what was once a lucrative revenue stream.

Trading has become a commodity business because of popular trading apps like Robinhood, which recently raised money in a funding round that valued the company at $7.6 billion.

Competition for customers is fierce and firms are launching new services to try and differentiate themselves. Mutual fund giant Fidelity, for example, recently unveiled a service that lets investors buy small chunks of high-priced stocks instead of entire shares. Robinhood already offers so-called fractional trading as well.

As a result, Wall Street speculated E-Trade could be a takeover target for either Morgan Stanley or Goldman Sachs (GS). Shares of another E-Trade rival, Interactive Brokers Group (IBKR), rose 3%.

The AP’s Stan Choe, Ken Sweet, and Michelle Chapman reported:

E-Trade will bring with it 5.2 million client accounts, $360 billion in retail client assets and a pool of customers who may become wealthier and use more of Morgan Stanley’s full-service offerings. Morgan Stanley has 3 million client relationships and $2.7 trillion in client assets.

The deal also gives E-Trade some shelter during a time of massive disruption in the retail brokerage industry. Its rivals Charles Schwab and TD Ameritrade are in the midst of their own merger, and the industry is still absorbing the latest blows from its price war. Brokerages have made it free to trade U.S. stocks and exchange-traded funds online, slashing their commissions to zero in hopes of attracting and keeping customers.

Brokerages still make money from account fees and interest earned on customers’ cash, but the price war hashurt revenues.

“Between zero trading commissions and competitive yielding savings accounts and cash management products, the competition for consumers’ cash and investments is as fierce as ever,” said Greg McBride, chief financial analyst for Bankrate.com. “And this reaches a broad spectrum of households, it isn’t just the ultra-wealthy that are in demand.”

Industry analysts believe the complementary parts of Morgan Stanley and E-Trade make them a good fit, and E-Trade’s stocks surged21.8% for the biggest gain in the S&P 500 index Thursday. But Morgan Stanley’s stockfell 4.5%, reflecting investors’ concerns that it may be paying too high a price.