Morgan Stanley eyed Eaton Vance for several years before agreeing Thursday to buy it in a cash-and-stock deal worth $7 billion, just days after it closed on its acquisition of E*Trade, Morgan Stanley CEO James Gorman said in a conference call.
Morgan Stanley (ticker: MS) expects to break even on an earnings-per-share basis immediately after the Eaton Vance (EV) deal closes in 2021, and expects the transaction to be “marginally accretive” to earnings after cost savings of $150 million, or 4%, of Morgan Stanley Investment Management’s and Eaton Vance’s combined expenses.
After Morgan Stanley’s acquisition of E*Trade closed earlier this month, rating agency Moody’s upgraded the bank’s credit ratings, saying the E*Trade deal “is another deliberative step in [Morgan Stanley’s] clear and consistent strategy to shift its business” toward recurring, profitable, and stable revenue from wealth management and investment management.
The deal should provide good things for Morgan Stanley shareholders, said Gorman. “Our competitor Charles Schwab [SCHW] is trading at 20 times earnings and we’re trading at 10 times earnings. It makes absolutely no sense,” he said. “Moody’s just upgraded us Friday night before this happened and this is clearly credit positive. If we traded at 14-15 times earnings, this stock would be a hundred bucks. We’re rerating Morgan Stanley.”
Tom Faust, Eaton Vance’s CEO, said the transaction was unanimously approved by the top 25 executives at the asset manager, who control the voting shares.
Morgan Stanley stock was up 0.4%, at $48.92, in recent trading, while Eaton Vance was up 48%, at $60.59.
By financing the transaction partly with cash, Morgan Stanley will use some of the excess capital that has been sitting in its coffers. It remains well above its regulatory requirements.
Morgan Stanley was attracted by Eaton Vance’s strong relationships with wealth managers; its swiftly growing Parametric operation, which provides customization solutions for portfolios, indexes, and separately managed accounts; its Calvert sustainable investments operation; and other strong-performing investment management operations. “Customization in separately managed accounts is a decades-long, very strong secular trend,” said Dan Simkowitz, head of Morgan Stanley Investment Management on the conference call.
Morgan Stanley will be able to distribute Eaton Vance’s products through its wealth-management, institutional, and international platforms. After the deal closes, the bank said, it will have the largest wealth and investment management platform in the world, with $26 billion in annual pro forma net revenue.
“We’ve been looking for a decade,” Gorman said. “Our job now is to integrate it successfully and continue to drive organic growth.”
The deal show that premium managers can command premium prices. Eaton Vance is one of the few traditional asset managers showing organic growth helped by flows into sustainable investment products from its Calvert and Parametric units.
The deal is the second significant asset management deal in just two weeks. This month, Trian Fund Management, the activist investor, took a 9.9% stake each in Invesco (IVZ) and Janus Henderson Group (JHG), with an eye to creating an asset-management giant. By contrast to Eaton Vance, both Invesco and Janus have struggled with outflows.
In an interview, Ali Dibadj head of finance and strategy at AllianceBernstein, said, “There will be more big deals in the asset-management industry as some firms throw in the towel on delivering alpha for clients.”
Cathy Seifert, a director at CFRA Research, wrote: “We see this deal, from a strategic acquirer like MS, as more attractive than an activist-driven forced merger of equals, especially among some of the laggard firms.”
KBW analyst Rob Lee wrote that he was leery of large-scale, cost-savings-driven transactions in the industry—like Trian’s recent moves—given the risk for substantial asset outflows. He thinks M&A speculation might center on BrightSphere Investment Group (BSIG) and Waddell & Reed Financial (WDR). Both stocks were up substantially on the Morgan Stanley deal.
Neither BrightSphere nor Waddell were immediately available to comment.
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