Wall Street investment bank Morgan Stanley will acquire E-Trade for $13 billion, the companies announced Thursday, the latest in a consolidation wave for the brokerage industry that collectively lowered trading commissions to zero last year.
Morgan Stanley will pay $58.74 a share in stock for E-Trade in a deal bringing together $3.1 trillion in client assets. Morgan Stanley shares fell 4.6% on the proposed purchase, the biggest takeover by a U.S. bank since the financial crisis. E-Trade shares jumped more than 21.8% to $54.73 per share.
"E*TRADE represents an extraordinary growth opportunity for our Wealth Management business and a leap forward in our Wealth Management strategy," Morgan Stanley Chairman and CEO James Gorman said in a statement. "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."
The deal, which is expected to close in the fourth quarter, follows last year's $26 billion all-stock purchase of TD Ameritrade by Charles Schwab. At the time, analysts speculated E-Trade may be next to find a partner as the discount brokerage industry faces increasing margin pressures from zero commission trading. After Schwab became the first major player to drop online commission fees last October, competitors including Fidelity and E-Trade were forced to follow.
"I think it's a fair price to E-Trade shareholders," said Devin Ryan, JMP Securities managing director of equity research. Morgan Stanley is buying E-Trade's shares at about a 40% premium to the stock price before the Schwab-TD Ameritrade deal was announced.
"For Morgan Stanley there's a longer term strategic play here around the digital opportunity and acquiring new corporate service customers and getting a higher percentage of their wallet over time," Ryan added.
E-Trade was an attractive acquisition target for Morgan Stanley given the broker's strong deposit base, which generates about $56 billion in deposits each year. In the past, Morgan Stanley has struggled to raise deposits to fund loans to its wealthy clientele. The deposits business will provide "significant funding benefits to Morgan Stanley," the bank said.
"They both have leading corporate stock plan businesses, and a big part of Morgan Stanley's growth initiative for the year in wealth management is converting those customers to Morgan Stanley wealth management customers," said Ryan. "E-Trade has nearly 2 million corporate stock plan customers and so this strategically widens the potential opportunity for Morgan Stanley to convert those customers."
Morgan Stanley expects to realize about $400 million in expense synergies, relatively smaller than what Schwab expects from the TD Ameritrade deal.
"We suspect that as a non eBroker acquirer, MS may not be able to remove costs such as marketing and certain platform costs that an in-industry player could be capable of," Piper Sandler analyst Richard Repetto said in a note to clients.
E-trade, with 5.2 million client accounts and over $360 billion of retail client assets, will be adding to Morgan Stanley's 3 million client accounts and $2.7 trillion of client assets, the release said.
"There's so many positives and there's going to be no dislocation to clients, its just adding to what they've already got," Morgan Stanley chairman and CEO James Gorman told CNBC on Thursday.
CEO of E-Trade Mike Pizzi will be joining Morgan Stanley and will continue to run the business and integration within the Morgan Stanley franchise. Analysts on Wall Street said Morgan Stanley is likely to keep E-Trade's strong brand name.
Compared to its peers, the combined company will still trail Fidelity, Vanguard and Schwab in terms of client assets.
The deal will likely pressure smaller brokers like Interactive Brokers, as well as Silicon Valley start-up Robinhood, which kick-started free stock trading in 2013.
— with reporting from CNBC's Nate Rattner.