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M&A Deals

Morgan Stanley Investment Management acquires Eaton Vance for $7bn — nearly doubling its AUM

Introduction

Morgan Stanley has acquired midsize American investment management firm Eaton Vance in a deal worth $7bn, adding a further $500m of assets under management (AUM) to Morgan Stanley’s Investment Management arm, almost doubling its current AUM to a new total of $1.2trn.

The Deal

This $7bn deal is another signal of Wall Street firms’ broader sentiment towards having more diverse and less risky income streams. The deal was financed using a mixture of cash and stocks, with Morgan Stanley paying $6.50 per Eaton Vance share.  This represents a significant premium, being 38% above the closing price of Eaton Vance on Wednesday October 7th.  James Gorman, chairman and chief executive of the US bank, attested his approval with the price and timing of the deal by commenting, “People who hang around trying to buy great companies cheaply never get anything done,” and that he is an advocate of “a fair price for a great business.”  If we look at Morgan Stanley’s long-term goals, this deal seemed inevitable — it was just a case of timing, and whether or not it would be executed in the current economic downturn.

“Unbelievable Balance”

Appetite for Morgan Stanley to diversify its operations stem from two years ago, when Mr Gorman vouched to double Morgan Stanley’s investment division in size within the next five to seven years. This is in line with steady trends amongst Wall Street’s elite banks to diversify their operations away from risky business lines, such as investment banking divisions and sales and trading divisions, and push towards operations with more stable, yet still lucrative, income streams such as asset management and consumer banking, since more stringent regulations and higher capital requirements were introduced post-financial crash in 2008.  Of Morgan Stanley’s three main divisions: Institutional Securities, Asset or Wealth Management, and Investment Management, the latter Wealth Management and Investment Management arms together delivered just over half of Morgan Stanley’s pre-tax profits in 2019, at 51.9%. The acquisition will increase pre-tax profits further to an estimated 58%, as the share of Morgan Stanley’s pre-tax profit made by sales and trading and investment banking drops from 74% in 2010 to an estimated 42%. At Goldman Sachs, this was 60% last year.

Diversification: new products and the US market

Eaton Vance’s broader distribution network of clients across the US provides Morgan Stanley with additional client reach, alongside new products in the form of dedicated ESG and sustainability-led investment products as well as municipal fixed-income investment products. Eaton Vance fills gaps and perfectly complements Morgan Stanley’s international offering.

Diversification: Wall Street to Main Street

Asset managers who charge a premium for actively managed funds, those which promise to outperform the market, have been placed under mounting pressure as investors increasingly embrace low-cost, passive funds with lower management fees and swift online access, run typically by firms such as Blackrock and Vanguard Group. Morgan Stanley’s diversification strategy also includes opening up its operations to Main Street clientele as Morgan Stanley had made another significant acquisition of ETrade, an online trading platform popular amongst younger, millennial consumers, earlier this year — in a deal worth $13bn.  ETrade is estimated to bring in up to 5.2 million younger clients, which could potentially form a pipeline towards Morgan Stanley’s core wealth management division whose clientele’s average age is 58 years old.  Goldman Sachs is similarly pursuing new growth within the consumer market via current accounts, cash management, and credit cards.

Future Asset Management performance

Asset management operations remain lucrative as clients increasingly rely upon the expertise of professionals over economic downturns, such as that recently brought about by the pandemic. Asset managers typically make 45% of their income from management fees charged on the value of their client’s asset base, whilst 55% comes from transactional revenue. Thus, as stock markets fell in value over the pandemic, causing asset values to decline, negative effects on revenue from this stream have been counterbalanced by increased transactional revenue, as asset managers seek investment opportunities within this period of economic distress. By their very nature, asset management firms have the financial and economic expertise to sustain their own businesses during downturns, remaining resilient throughout the market cycle. The timely acquisition of Eaton Vance simply adds to Morgan Stanley’s strength over downturns.

Despite huge leaps afforded by acquiring Eaton Vance, in terms of diversity of products and almost doubling Morgan Stanley’s assets under management to $1.2trn, Morgan Stanley has become a midsize player — too large to be considered a boutique investor yet too small to fully realise the cost savings of giants like BlackRock (with $7.3trn AUM). However, when compared against its own peers, namely, JPMorgan, Bank of America, Wells Fargo, and Goldman Sachs, time will tell how successfully each have diversified their business models to navigate shifting demographics of clientele and future trends in passive, sustainable investment.

Sources

https://www.ft.com/content/635db026-2e71-4b39-b703-c7233074c84b

https://www.statista.com/statistics/431790/leading-asset-management-companies-worldwide-by-assets/#:~:text=BlackRock%2C%20with%20managed%20assets%20amounting,U.S.%20dollars%20in%20managed%20assets.

https://hbr.org/1999/11/stock-or-cash-the-trade-offs-for-buyers-and-sellers-in-mergers-and-acquisitions

https://www.ft.com/content/3858cd4b-1701-41c0-9c1b-605865ea922b

https://www.pwc.com/us/en/library/covid-19/coronavirus-asset-and-wealth-management.html

https://www.nytimes.com/2020/10/09/business/dealbook/morgan-stanley-eaton-vance.html

https://www.investopedia.com/articles/markets/082515/how-morgan-stanley-makes-its-money-ms.asp

https://www.wsj.com/articles/morgan-stanley-to-buy-eaton-vance-in-deal-valued-at-7-billion-11602159806

https://bloncampus.thehindubusinessline.com/columns/geo-eco/morgan-stanley-buys-eaton-vance-because-it-can/article32835757.ece

https://www.ft.com/content/22d7c870-870d-4423-bd6f-6e384961f997

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