What Eaton Vance Purchase Means for Morgan Stanley
We don't expect to change our fair value estimate for narrow-moat Morgan Stanley.
Our initial impression of narrow-moat Morgan Stanley’s (MS) acquisition of narrow-moat asset manager Eaton Vance is that it’s strategically sound but that it won’t move the needle on our $56 fair value estimate for Morgan Stanley. The deal is worth approximately $7 billion compared with Morgan Stanley’s market capitalization of over $85 billion. Eaton Vance shareholders will receive $28.25 per share in cash, 0.5833 share of Morgan Stanley stock, and a $4.25 per share special dividend before the close of the transaction. Morgan Stanley expects the transaction to be mildly accretive to earnings per share and increase returns on tangible equity about 100 basis points after expense synergies are achieved.
The implied value of the deal is materially higher than our stand-alone value for Eaton Vance, which we intend to increase to the takeout price, but comes with both financial and strategic benefits. The companies estimate $150 million of expense synergies. While this may seem low, the relatively low savings is from the firms being complementary and having less overlap in products. Having less overlap in asset management should lead to less disruption from the integration and keeping more of the combined firms’ revenue. Dis-synergies from client attrition often come with asset manager mergers, but leveraging each other’s distribution platforms, Eaton Vance for financial advisors in the U.S. and Morgan Stanley for institutional and international, could actually lead to meaningful revenue synergies.
Strategically, the acquisition scales Morgan Stanley’s asset management business and gives the company exposure to more positive trends in asset management, but wealth management remains more important to the firm. At $5 billion of revenue and $1.2 trillion of assets, Morgan Stanley will be one of the larger asset managers. However, asset management will still only constitute about 10% of the company’s total net revenue.
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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.