Morgan Stanley to buy E-Trade for $13bn in bid to tap online traders

Written by Ruby Hinchliffe
21st February 2020

Morgan Stanley has announced its plans to buy E-Trade, the electronic platform used by financial traders, for $13 billion. The acquisition pits the Wall Street investment bank, which has long-served the wealthy, firmly in the world of regular online consumer trading.

The biggest takeover by a major American lender since the 2008 global financial crisis, conversations prior to the eventual deal began as early as 2002 according to the bank’s CEO James Gorman. He tells CNBC: “It was always buy verses build.”

Morgan Stanley, which held $2.7 trillion in assets before the deal, will pay $58.74 a share in stock for E-Trade, gaining an additional 5.2 million customer accounts and a further $360 billion in assets. The acquisition signals Morgan Stanley’s desire to cater to less wealthy customers who only want to trade via online platforms.

Morgan Stanley decides to buy rather than build like Goldman Sachs

“This continues the decade-long transition of our firm to a more balance-sheet-light business mix, emphasizing more durable sources of revenue,” says Gorman. “E-Trade represents an extraordinary growth opportunity for our wealth management business and a leap forward in our […] strategy.”

E-Trade has been struggling since the price war began between brokerages, brought on by the emergence of fee-free investment apps such as Robinhood and Stash. Incumbents such as Charles Schwab were then forced to eliminate fees for the trading of stocks and exchange-trade funds (ETFs), introducing an imbalance in prices on the market.

Still subject to approval from E-Trade shareholders and regulators, the deal, expected to close in the fourth quarter, will mean more than half of the bank’s pretax profits will now come from wealth and investment management.

Industry experts believe the deal will help the bank cut down on its risk, but with a new customer base to serve it will also have to open up its product offerings. “It gives them [Morgan Stanley] a direct-to-consumer brokerage business, and $56 billion in deposits which will help cut down on risk during an economic downturn,” says Forrester’s senior analyst Vijay Raghavan.

“[But] nearly half of E-trade’s customer base (48%) is comprised of self-directed investors,” says Raghavan. “Self-directed investors prefer robust trading tools, real-time market commentary, and charting tools, to name a few.”

Preferring to buy rather than build, Morgan Stanley takes a different approach to one of its largest competitors Goldman Sachs, which decided to build its retail lending arm Marcus and later partner with Big Tech Apple.