E*Trade Financial deal: Morgan Stanley fuels banking takeover buzz

The chief executive (CEO) officer of Morgan Stanley, James Gorman, had just ended a decade-long drought of major takeovers by top US banks with his surprise deal to buy E*Trade Financial Corp for $13 billion. Across the industry, speculation was erupting that conditions had finally lined up for a wave of similarly hefty acquisitions.

Morgan Stanley’s announcement is being interpreted by analysts, investors, and investment bankers as just the start of a long-predicted series of deals big enough to reshape the upper echelons of the US financial industry. Many of the largest banks are wielding highly valued stocks at a time that Silicon Valley innovators are looking to wrest away business. Mergers and acquisitions (M&A) are one way for banks to both scale up and adapt.

“The financial performance of the industry allows acquirers to transact from a position of strength,” said Anu Aiyengar, co-head of global M&A at JPMorgan Chase & Co. “More broadly, digital disruption is making it more important to optimise cost and efficiency.”

Some observers also point to the prospect that regulation may stiffen after US elections in November if a Democrat wins the presidency. The field of candidates seeking to challenge Donald Trump includes several who have vowed to rein in — or even break up — ‘too big to fail’ banks.

‘Big chance’

Gorman had eyed the online retail brokerage for almost 20 years before everything lined up. For Morgan Stanley, the all-stock deal lands E*Trade’s direct-to-consumer digital capabilities as well as $360 billion of client assets. Gorman reassured analysts that his firm is already conferring with regulators — such as the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. — to win approval for the deal.

“We wouldn’t be entering into this if we didn’t think, from a regulatory perspective, this would be viewed favourably,” Gorman said. “That’s not something we would put to big chance.”

While Gorman said he still sees E*Trade as a so-called bolt-on acquisition, the price is significantly larger than the takeovers the largest banks have emphasized in recent years to augment business lines. It may open the way for rivals to seek larger targets too.

Other industries

Matchmakers have proposed a wide variety of large takeovers by big US banks over the past decade only to be disappointed. Some suggested, for example, that credit-card lender Discover Financial Services could make a juicy target for a variety of large consumer banks. 

It’s not just banks seeking to grow through M&A. The two biggest US life insurers, MetLife Inc. and Prudential Financial Inc., are both open to acquisitions even as they seek to divest in slower-growth areas. 

Leaders of payments companies also have said they’re looking to participate in the industry’s consolidation. Mastercard Inc’s CEO Ajay Banga compared his business development team to ‘gnomes in Santa’s shop’ that bring him as many as 60 deals in a year to consider. FleetCor Technologies Inc., a fuel card provider, has said it has a list of ‘big elephants’ it hopes to bag.

Wealth managers and robo-advisers are also appealing targets because of their relatively stable revenue, which can offset volatility from trading businesses. Goldman Sachs bought United Capital for $750 million last year, while Morgan Stanley beefed up its wealth division by buying stock-plan administrator Solium Capital Inc. for $900 million.

Buyers aren’t the only ones under pressure. Charles Schwab Corp’s acquisition of TD Ameritrade Holding Corp. in November reshaped the brokerage industry and encouraged E*Trade to consider a sale. Goldman Sachs Group was among firms that also took at least a cursory look at E*Trade before giving it a pass, according to people with knowledge of the matter. “Frankly, if I’m on the E*Trade board, I’m certainly feeling a sense of urgency to find a buyer,” Thomas Bradley, the former president of TD Ameritrade, said at the time.

Still, Gorman cautioned that it’s unlikely that the biggest banks will try to pull off transformational deals. They will instead stick to targets that add capabilities or round out businesses. And not every firm, he noted, has the means to shop. “You’ve got to be in the condition to do it, your stock has to reflect the value of the company, you have to have momentum that investors want to see,” Gorman said in an interview.