Why Morgan Stanley's E*TRADE Buyout 'Makes Strategic Sense'

E*TRADE Financial Corp ETFC shares soared higher by 24.6% on Thursday after Morgan Stanley MS announced a $13 billion all-stock buyout of the trading platform.

The deal is expected to close in the fourth quarter and will further increase Morgan Stanley’s focus on relatively stable wealth management business and decrease its reliance on institutional trading.

In addition, Morgan Stanley will gain access to E*TRADE'S $56 million in deposits, potentially lowering its funding costs by an estimated $150 million. The deal is expected to generate more than $500 million in total synergies over the next three years.

The deal marks the biggest buyout in the U.S. financial sector since the financial crisis. Morgan Stanley is hoping it can further monetize E*TRADE’s 5.2 million customers and $360 billion in assets. However, Morgan Stanley shares were down 3.6% on Thursday, suggesting investors may not be happy with the deal’s price tag.

Analyst Weighs In

Bank of America analyst Michael Carrier said the buyout will be accretive to both earnings per share and return on average tangible common stockholder's equity, but will be dilutive to tangible book value. Carrier said the deal shouldn’t impact Morgan Stanley’s buyback plan through at least the first half of 2020.

“Overall, we think the deal makes strategic sense given shifting trends in wealth management (demographics, technology, etc.), though integration, culture/talent, client retention, and capital management will all be key ahead for the stock,” Carrier wrote in a note.

While the deal is priced at roughly a 30% premium to E*TRADE’s Wednesday closing price, E*TRADE shares were down 7.6% in the year prior to the deal due to a pricing war among online brokers that has resulted in most popular brokers eliminating standard stock trading commissions.

Bank of America has a Buy rating and $62 price target for Morgan Stanley.

Benzinga’s Take

Morgan Stanley appears to believe the commission fee war created a buying opportunity with E*TRADE. Traders should be on the lookout for more potential consolidation in the online broker space in the weeks ahead.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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