Morgan Stanley and ETrade Merger Valuation

Dear Reader,


Morgan Stanley announced today that it is buying discount brokerage ETrade for 13 billion USD in stock. https://www.wsj.com/articles/morgan-stanley-is-buying-e-trade-betting-on-littler-customers-11582201440

Is this a good move for Morgan Stanley? It depends on the future of the stock brokerage market. Morgan Stanley seems to think that the stock brokerage market and wealth management market will grow. Yes, this may be true for wealth management, but for stock brokerage the recent past has not been very kind. Brokerage fees globally are down since 2007. Yes, the wealth management market leaves a lot of room for expansion, but this is a people intensive business.

In my opinion, net the Morgan Stanley ETrade deal is mildly value creating. Yes, Morgan Stanley will realize cost savings, but 13 billion USD is a lot of money to pay. 13 billion USD is something like 14% of Morgan Stanley's current market capitalization. And furthermore, there will be a huge culture clash between Morgan Stanley's premium wealth management employees and the more mundane regular people wealth management practice of ETrade.

I do not think investment banking is dead. After the coming economic crisis investment banking will bounce back and the banks that scaled back on investment banking like Morgan Stanley, UBS, Deutsche Bank, Credit Suisse, HSBC etc. will all want a foothold in investment banking again.

So basically, I think this Morgan Stanley ETrade deal is a huge gamble for Morgan Stanley. Just by a back of the envelope calculation, it will take Morgan Stanley 13 years by getting ETrade's last annual profit to recoup the 13 billion USD Morgan Stanley pays.

Nonetheless, I think Morgan Stanley is 10% undervalued as things stand.

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Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

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Respectfully yours,

Petar Posledovich