Morgan Stanley said Thursday it is buying online brokerage E*Trade for $13 billion, an acquisition that will expand the Wall Street's firm into managing accounts for smaller investors.
E*Trade will bring 5.2 million client accounts with a total of more than $360 billion in assets to Morgan Stanley, which has long catered to wealthier clients. The investment bank's 3 million customers have a combined $2.7 trillion in assets.
Morgan Stanley said E*Trade CEO Mike Pizzi will remain with the company after the acquisition and continue to run the brokerage firm. E*Trade has come under pressure in recent months amid a fee-cutting battle from rivals such as Charles Schwab, which has cut its trading fees to zero. And in November, Schwab and TD Ameritradecreating a powerhouse rival.
"With equity trading now free, brokerage firms need to find new ways to generate sustainable revenue," said Drew Pascarella, senior lecturer of finance at Cornell University's SC Johnson College of Business, in an emailed statement. "Providing wealth management advice digitally is one such revenue stream."
E*Trade will provide Morgan Stanley "with a massive base of clients to whom they will sell advice," Pascarella added. "There are significant economies of scale and cost-related advantages from this deal, too. Overall I see this as a nice win for both Morgan Stanley and E-Trade."
Shares of E*Trade jumped $11.49, or 25.6%, to $56.42 in Thursday morning trading. Morgan Stanley's stock price fell $1.57, or 2.8%, to $54.74.
The deal could face scrutiny by bank regulators, said Cowen & Co. analyst Jaret Seiberg, who added he believes the acquisition will ultimately receive approval.
"This is not going to be an easy deal to move through the Federal Reserve," Seiberg noted in a research note. "Morgan Stanley is a [Fed-designated] Globally Significant Financial Institution, which means any sizable deal is subject to strict review on whether it will impact systemic stability."
While Morgan Stanley said it believes the deal will close by year-end, Seiberg said he expects it could take longer due to regulatory concerns. "We would not be surprised if it spilled into 2021 simply because of the need to address the systemic risk aspects of the transaction," he noted.