Inside Morgan Stanley's $7 billion deal for Eaton Vance

Inside Morgan Stanley's $7 billion deal for Eaton Vance
The deal adds to the $13 billion acquisition of the discount brokerage E-Trade as the wirehouse looks to evolve beyond its investment banking roots
OCT 08, 2020

Morgan Stanley's James Gorman continues to take advantage of the shifting landscape for financial services to build the franchise beyond its investment banking and retail brokerage roots.

For the past decade, Gorman, who became CEO in 2010, has focused on integrating Smith Barney's financial advisers into Morgan Stanley, which now has more than 15,000 registered reps and financial advisers under its roof.

But more recently, he's been on a spending spree.

With the discount brokerage industry reeling last year after the Charles Schwab Corp. said it was cutting the commission on stock and exchange traded fund trades to zero, the firm in February said it was buying ETrade Financial Corp. for $13 billion in a move to reach younger and less affluent clients.

Now, as active money managers continue to struggle as investors turn to index-based products like exchange-traded funds, Gorman again moved to build Morgan Stanley into a diversified financial services company when on Thursday the firm said it was buying money manager Eaton Vance for $7 billion.

Add in Morgan Stanley's 2019 acquisition of Canadian stock plan business Solium Capital Inc. in an effort to reach younger and tech savvy clients, and Morgan Stanley is a firm that is under transformation.

"All those acquisitions are complementary pieces to Morgan Stanley's wealth management business," said Louis Diamond, an industry recruiter. "It’s hard to see how an adviser would have an issue with any of them. They're being done to bolster the franchise and scale of the firm."

Eaton Vance also has a notable ESG — environmental, social and governance — line of offerings, which are particularly in demand by wealthy and young investors, he noted.

"Advisers hate proprietary products and being told to use in house funds," Diamond said. "But it will be interesting to see if the firm cuts costs on the Eaton Vance funds and separately managed accounts in order to make it another benefit to Morgan Stanley's advisers."

"This transaction further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class investment banking and institutional securities franchise," Gorman said in a press release. When the deal closes, Morgan Stanley Investment Management will have close to $1.2 trillion in assets under management.

Potential positives of the transaction include Eaton Vance appearing to be "complementary" to Morgan Stanley's current money management business, with limited overlap in investment and distribution capabilities, according to Barclays' analyst Jason M. Goldberg. Eaton Vance has also seen relatively strong flows into its funds, Goldberg wrote in a note Thursday morning after the deal was announced.

One concern was the wirehouse "undertaking another acquisition so soon after [ETrade Financial], increasing execution risks for only marginal earnings per share accretion," Goldberg noted.

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