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E*Trade Acquisition: Independent Brokers Doomed

Updated: Mar 11

Morgan Stanley recently announced that it will acquire E*Trade Financial in an all-stock deal. The deal is valued at $13 billion as the industry has seen online brokers have dropped stock and ETF trading commissions to $0.


The merger will add 5.2 million accounts to the company’s customer base of three million. Morgan Stanley will now handle assets of over $3 trillion while at the same time gain exposure to a less affluent retail segment.


The E*Trade transaction shadows another major acquisition in the brokerage sector. In November 2019, super brokerage rivals Charles Schwab and TD Ameritrade agreed to merge in a $26 billion, all-stock deal.


“E*Trade represents an extraordinary growth opportunity for our wealth management business and a leap forward in our wealth management strategy,” remarked Morgan Stanley CEO James Gorman in the press release. “In addition, this continues the decade-long transition of our firm to a more balance sheet light business mix, emphasizing more durable sources of revenue.”


Morgan Stanley’s wealth management business has developed into an increasingly vital growth driver as Wall Street trading desks have tailed off. Reports are that Gorman had been seeking the E*Trade since 2002, according to sources including the Wall Street Journal, which first reported the buyout. The paper termed it the largest takeover by a U.S. bank since the financial crash.


The Morgan Stanley acquisition leaves Interactive Brokers as the one notable brokerage firm remaining—making the firm a prime takeover candidate.


What Morgan Stanley Gets From E*Trade


Morgan Stanley’s acquisition allows the bank to diversify some of its more affluent customer base by adding a wider variety of investors with different levels of assets. Research shows that nearly half (48%) of E*Trade’s customer base is comprised of so-called self-directed investors, who seek robust trading tools, real-time commentary, charting tools, and other features. Morgan Stanley’s wealth management business has served traditionally affluent investors who depend upon financial advisors to make investment decisions on their behalf.


The acquisition will provide Morgan Stanley with a boost in the field of deposits, since it had experienced difficulties in recent years. E*Trade’s deposits business will do just that, Morgan Stanley executives say.


E-Trade had been hindered by the zero-fee war, and it relied more on commissions that its competitors. The company will now give Morgan Stanley a direct-to-consumer brokerage business and $56 billion in deposits.


Last year, some analysts designated E*Trade as a possible takeover target by Goldman Sachs and Morgan Stanley as brokerages continued to transition to a zero commissions business. Goldman Sachs initially pursued the possibility of an E*Trade merger but backed away because of its new Marcus consumer business having accumulated more than $50 billion in deposits, according to CNBC.


Breakup Penalties


Another aspect of this merger is that if E*Trade cancels the deal with Morgan Stanley, the financial giant will see a payday of $375 million for the breakup, according to Reuters. Similarly, if Morgan Stanley terminates the deal due to antitrust issues, E*Trade would get the tidy sum of $525 million, according to regulatory filings.


Morgan Stanley anticipates concluding the transaction by the fourth quarter. Bank executives are confident there won’t be any issues obtaining regulatory approvals.


There are, however, concerns that antitrust issues could thwart the Charles Schwab-TD Ameritrade merger because the combined company would have custody of more than 50% of assets for investment advisors. If the merger gains regulatory approvals, it is expected to close in the second half of 2020.


The Merger Spells the Demise of Independent Online Brokers


The deal for E*Trade marks the end of an era. Discount brokers have battled each other for decades—since 1975 when Charles Schwab started operating as the first player in discount brokerages. Discount brokers have looked for a competitive advantage and have attempted to set themselves apart from their full-service counterparts by charging reduced fees. However, the specific areas in which they’ve challenged each other have changed a several times along through the years.


For example, in the late 2000s, brokers such as Schwab, Vanguard, TD Ameritrade, and E*Trade sought to find avenues to provide their customers commission-free purchases and sales of certain exchange-traded funds, with the aim of taking advantage of the popularity of the ETF revolution.


And just a few years ago, brokers began to focus their attention on gradually reducing their basic commissions for making stock trades. In order to address the competition from new online upstarts that offered commission-free trading, Schwab went ahead last year and cut its commissions to nothing. That motivated TD Ameritrade, E*Trade, and others to do the same.


Read about Carpenter Wellington's mergers and acquisitions practice.

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