Morgan Stanley on the Rise With M&A and New Management Succession

Alex Cho

Alex Cho

CEO l Research Director

[email protected]

Jason Chen

Jason Chen

COO l Research Editor

[email protected]

Shakeel Stewart

Shakeel Stewart

Columnist and Author

Morgan Stanley (NYSE: MS) is a global financial institution that provides investment banking, securities, wealth management, and investment management services. Its largest segment is Institutional Securities which covers its industry leading investment banking operations representing 53% of revenues. While it is generally focused on the fast-growing tech sector it is poised to benefit from overall increased capital market activity in 2021 with a robust pipeline of deals. It is also dominant in Asia where it is the market leader ahead of Asian investment banks such as Goldman Sachs (NYSE: GS) and JPMorgan (NYSE: JPM). As the region continues to grow rapidly economically and with US listed Chinese firms seeking to raise capital back home amid delisting fears, the company has managed to build a strong pipeline of deals credited to its early focus in the region.

On the wealth and asset management front, which represents a burgeoning revenue stream, the firm has signaled its commitment with the acquisitions of E*Trade and Eaton Vance. E*TRADE, acquired in 2020, is an expansion in the brokerage market where it has traditionally focused on institutional clients. E*Trade not only brings cross-selling opportunities, but also a pool of low-cost client deposits to lend and invest. On the asset management side, the acquisition of Eaton Vance provides a boost to its AUMs allowing it to achieve greater scale and product offering expansion. 

Had Significant Investment Banking Revenue Growth

Topping off the year 2020 with a solid investment banking revenues growth rate of 26%, Morgan Stanley has maintained a leading position in the investment banking market. Despite its smaller market cap relative to its peers JPMorgan, Goldman Sachs and Bank of America (NYSE: BAC), its leadership is firmly entrenched with a 7.3% share of fees. Its growth was mainly driven by robust equity underwriting growth which has almost doubled. In 2021, Morgan Stanley stands to maintain this solid momentum backed by a strong pipeline of deals as companies seek to capitalize on the low rate environment to raise additional capital.

Geographically, Morgan Stanley’s presence in the Asia Pacific region has been strong as the company saw the massive opportunity early and expanded aggressively in the region. It leads the Asia Pacific equity capital markets ahead of Asian banks and international names such as Goldman Sachs and JPMorgan. The region is a key driver of growth for the company having grown at a 13.4% CAGR in the past 5 years compared to North America which grew at 8.4% based on its annual report.

Wealth and Asset Management Growth via M&A

Morgan Stanley is focused on expanding its wealth management and asset management segments with the acquisitions of leading financial institutions. In October 2020, the company completed the acquisition of E*TRADE Financial at $13 billion. The acquisition of E*TRADE enabled the company to expand its wealth management segment’s brokerage channels as E*TRADE is primarily a self-directed brokerage business focused on discount trading while Morgan Stanley traditionally relied on institutional clients. Based on the Q4 2020 results, it reported additional client assets of $1.1 billion for a total wealth management client asset base of $4 billion with 5 million clients.

At first glance, the deal may seem odd as both businesses operate in different channels. We believe that one of the main reasons is that Morgan Stanley is seeking to diversify from its traditional wealth management business by expanding in the fast-growing discount brokerage business with the digitization and commission free trading trend leading to increasing mass market adoption. However, the main feature of the deal is that it enables Morgan Stanley to tap $56 billion of low-cost deposits from E*TRADE clients which it can lend and invest to earn a higher spread. It can lend out or invest client deposits in investment securities, loans and margin loans. In 2020, the segment earned interest income of $4.7 billion on a loan portfolio of $98 billion translating to an interest rate of 4.8% while the average rate on deposits was 0.24%. Applying this to its deposits, the company could earn an additional $2.5 billion in net interest income. Moreover, the company expects $550 million in costs and funding synergies from management expenses savings.

In addition, there could be cross-selling opportunities between some of E*TRADE clients and Morgan Stanley’s wealth management business because of the enhanced product and services portfolio. For example, the firm could offer research and virtual advisory services to E*TRADE clients. Overall, we expect revenue synergies of at least $2.5 billion in net interest income and $550 million in cost synergies.

Besides its wealth management division, the company is expanding its asset management business with the acquisition of fund management company Eaton Vance Corp for $7 billion to be completed by Q2 2021. The acquisition is consistent with the trend of more consolidation among asset managers to achieve greater scale and efficiency. Combined, the company will have a total AUM of over $1.2 tln with $500 billion contributed by Eaton Vance as well as total revenues of $5 billion with incremental revenues of $1.3 billion from Eaton Vance. This would make the firm one of the largest asset management firms in terms of AUM market share.

According to Moody’s, the deal serves to tilt the firm’s portfolio further towards lower-risk and recurring revenue streams and allows the company to expand on specific products where it did not focus on such as municipal bonds and sustainable investing. Additionally, the combination of Eaton Vance’s US retail distribution together with Morgan Stanley’s international distribution enhances client opportunities. Around 65% of sales from Morgan Stanley is from international markets while Eaton Vance only has 5% international exposure. Overall, we believe the acquisition will provide long-term benefits for Morgan Stanley through increased scale, improved distribution, incremental revenues of $1.3 billion and cost savings of $150 million as guided by management.

Morgan Stanley Executive Shakeup

On May 20, 2021, Morgan Stanley Chief Executive Officer, James Gorman, unveiled his biggest leadership shakeup in more than a decade, positioning a small group of lieutenants as his most likely successors. Ted Pick, the architect of Morgan Stanley’s trading revival, and Andy Saperstein, who built the company into a wealth-management powerhouse, were tapped as co-presidents and given expanded roles atop the Wall Street bank that’s been gaining ground on rivals. Furthermore, Investment Management Chief Dan Simkowitz will gain clout as co-head of strategy alongside Pick, and Chief Financial Officer Jon Pruzan will become Chief Operating Officer. We believe Ted or Andy will be well positioned to execute Morgan Stanley’s future ambitions as the company seeks to become a bigger wealth management company. 

Morgan Stanley continues to be a leading investment bank and is setting up for a busy year with a pipeline of capital market activity in store. Its focus on the tech sector, which it leads, is allowing it to reap the benefits, as emerging tech companies actively seek to raise capital through public listings. The company is also highly dominant in Asia owed to its early entry and emphasis on the region as an attractive market for activity. It has secured a pipeline of deals outcompeting Asian based investment banks as well as Goldman Sachs and JPMorgan. 

Moreover, the company is diversifying with its acquisitions of E*TRADE and Eaton Vance to expand wealth and investment management businesses. These acquisitions are highly strategic and could provide significant long-term benefits by leveraging E*TRADE’s clients funds to earn additional income and enable cross-selling opportunities. Eaton Vance not only expands Morgan Stanley’s product offerings to cater to evolving client needs but also leverages its international distribution to grow Eaton Vance’s base. Together with its executive succession planning, we believe Morgan Stanley is strongly positioned for its future ambitions.

Disclosure: Cho Research was not compensated by Morgan Stanley to publish “Morgan Stanley on the Rise With M&A and New Management Succession” Though Cho Research does use the research dollars it
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