Picture: REUTERS
Picture: REUTERS

New York — Morgan Stanley has agreed to buy discount brokerage E*Trade Financial Corporation for $13bn, pushing further into the retail market in the biggest acquisition by a Wall Street firm since the financial crisis.

The all-stock takeover adds E*Trade’s $360bn of client assets to Morgan Stanley’s $2.7-trillion, the companies said on 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.

“Our clients increasingly want digital access and digital banking, and their clients want wealth-management advice,” CEO James Gorman said in an interview. “It’s the continuing evolution of Morgan Stanley into a stable, well-diversified business.”

In reshaping the firm since the financial crisis, Gorman has been emphasising Morgan Stanley’s wealth-management powerhouse. Purchasing E*Trade helps him add clients who are less wealthy 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.

“Wall Street banks continue to covet Main Street customers,” Greg McBride, an analyst at Bankrate.com, said in an e-mail. The acquisition “gives them access to brokerage customers, employees with company stock, and the lifeblood of financial services — low-cost retail bank deposits”.

The retail-brokerage industry is being reshaped by price wars and consolidation. In early October, Charles Schwab eliminated commissions for US stock trading, spurring other brokerages to follow suit and sweeping away an important revenue stream.

The following month, Schwab agreed to buy rival TD Ameritrade Holding for about $26bn and create a mega-firm with $5-trillion in assets, forcing smaller brokerages such as E*Trade to contend with a much more formidable competitor.

‘Hefty price’

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.

“It’s a pretty hefty price,” said Alison Williams, an analyst at Bloomberg Intelligence. The deal is consistent with Morgan Stanley’s strategy to dive deeper into the mass-affluent market, she said.

Shares of Morgan Stanley slumped 4.1% to $54.01 at 9.34am in New York, the biggest intra-day decline in six months. E*Trade surged the most in almost 11 years, gaining 24% to $55.90. Gorman said he expects Morgan Stanley shares to rebound once investors start valuing the stock at a higher multiple over the long term.

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.”

E*Trade, founded in 1982, was one of the early players in the discount-brokerage industry. Its reach with self-guided traders online gives Morgan Stanley access to a broader customer base, including those who may have less to invest than its current clients.

Morgan Stanley will keep the E*Trade brand in some way, Gorman said on a conference call with analysts. “It’s something I think you’d be completely nuts to get rid of,” he said, comparing the brand’s worth to how valuable Merrill Lynch is to Bank of America and the Chase name is for JPMorgan Chase.

Long seen as a potential takeover target for the likes of TD Ameritrade, E*Trade was left looking for ways to re-invent its image and lure more customers in the wake of its rival’s merger with Schwab. In a signal that it was on the hunt for acquirers, a January filing boosted compensation for executives in the event of a change in control.

JPMorgan served as the lead financial adviser to E*Trade, and Skadden, Arps, Slate, Meagher & Flom was external legal counsel.