In the biggest deal by a US bank since the financial crisis, Morgan Stanley is acquiring discount stock broker E*Trade. The $13 billion deal will give the Wall Street bank a platform for serving everyday investors.
E*Trade, which was a popular retail broker in the dot-com bubble, has gradually had its share of the market eaten into by commission-free alternatives like Robinhood, leading the firm to consider acquisition.
For Morgan Stanley, E*Trade offers unique financial trading technology, and $360 billion in client assets – a low-cost funding source that Morgan Stanley can transform into interest income. Critically, E*Trade also offers Morgan Stanley the opportunity to land five million more retail customers, mostly millennials, that might one day grow to become affluent customers of its Wealth Management arm. A similar deal was made by Morgan Stanley in February 2019 with the purchase of software company Solium Capital, which came with the potential for taking on thousands of young, salaried clients.
In the broader deal making scene, the endless slashing of fees has led to several mergers as brokerages and fintech upstarts seek economies of scale to defend against price competition, and combine to capture a larger share of the market.
As Acuity Partner Richard Baker says, fintechs are also increasingly considering acquisition by non-typical buyers:
“Morgan Stanley’s acquisition of E*Trade represents 2020’s next $10bn+ deal” says Baker. “This continues 2019’s trend of new and non-traditional buyers of larger assets across the sector.”
This development was highlighted in November last year with the $26 billion purchase of TD Ameritrade by Charles Schwab. And already in the first two months of 2020 we have seen eleven billion dollar-plus transactions in this vein with a collective worth of over $58 billion.