Spending the latter would have affected Morgan Stanley’s capital ratios, at a time when, just weeks following the deal, big US banks are facing extraordinary challenges to their bottom line.įears of the spread of Covid-19, or coronavirus, greater risks of a US economic downturn and a slump in oil prices all contributed to the ending of an 11-year bull run on US stock exchanges in March. “With hindsight, Morgan Stanley was lucky to have announced the deal when it did, when US stock markets were at an all-time high and also to have structured it as an all-share, and not a cash, transaction,” says Michael Wong, financial markets analyst at Morningstar Research Services. Morgan Stanley did not provide estimates of what these potential earnings will be when announcing the takeover. In the long term, however, the bank’s executives argued that the value of the bank’s franchise and earnings will go up as opportunities for organic growth increase. Mr Pruzan acknowledged that in the short term the value of Morgan Stanley shares would suffer a decline, or a dilution, of “about 10%”. Jonathan Pruzan, chief financial officer and executive vice-president of Morgan Stanley, said that once the deal closes, which is expected at the end of 2020 – subject to the customary regulatory approvals and acceptance by E-Trade shareholders – costs will exceed savings for the first three years of integration. However, they questioned what they considered the high price for the all-share transaction, representing a 30% premium paid by Morgan Stanley on the closing price of E-Trade shares on February 19. Investors on the conference call agreed with the bank’s executives that there was much that they considered positive about the surprising deal. “E-Trade’s products, innovation in technology and established brand will help position Morgan Stanley as a top player across the full spectrum of wealth management,” he continued, indicating his tenacity in his quest to buy E-Trade, which he said he had first sought to buy in 2002 when he was an executive at Merrill Lynch. The addition of E-Trade represents “a leap forward in this wealth management strategy” and “an extraordinary growth opportunity”, he said, according to Morgan Stanley’s transcript of the call. In his decade of leadership, which has encompassed the aftermath of the financial crisis and numerous changes in regulations, he has repositioned the bank, reducing its dependency on more volatile trading revenue and expanding its more reliable, fee-earning wealth management business. It is not the first transformational move Mr Gorman has made at the bank. The merger, announced in a conference call with investors on February 20, was presented by James Gorman, chairman and chief executive of Morgan Stanley, as a strategic move that he said was vital for the bank’s long-term earnings and growth. In banking terms, 2020 started with a revolutionary deal: Morgan Stanley, the erstwhile pedigree investment bank that traditionally focused on large corporations and the very rich, took its biggest step yet into mainstream retail brokerage, striking an all-share agreement valued at $13bn to buy E-Trade, a digital discount brokerage that pioneered cheap online trading. The US banking sector is changing rapidly as the global spread of Covid-19 brings fears of the devastating loss of human lives and an economic recession.
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