Morgan Stanley Undersells Synergies in E-Trade Deal
We don't at this time anticipate a material change in our fair value estimate for Morgan Stanley.
We believe that narrow-moat Morgan Stanley (MS) may be underselling its likely expense and revenue synergies in its announced merger with narrow-moat E-Trade (ETFC). The all-stock deal (where E-Trade shareholders will receive 1.0432 shares of Morgan Stanley for each share held) values E-Trade at about $13 billion. We are placing our fair value estimate for E-Trade under review, as we're likely to raise our fair value estimate for the company around 15% based on an estimated 75% to 100% probability that the deal is completed. We don't at this time anticipate a material change in our fair value estimate for Morgan Stanley, as any value added from the $13 billion acquisition isn't likely to be that significant compared with our $90 billion valuation for the firm.
Morgan Stanley laid out $550 million of synergies from the merger--$400 million coming from general administrative expenses (about 25% of E-Trade’s 2019 expense base) and $150 million from funding synergies--but these numbers look conservative to us. In the Charles Schwab-TD Ameritrade deal, Schwab is aiming for expense synergies equal to 60% to 65% of TD Ameritrade’s expense base. While the business models at Schwab and Ameritrade are more similar to each other than they are at Morgan Stanley and E-Trade, we expect that more expense synergies could be realized as Morgan Stanley has more time to look at E-Trade's operations. A big piece missing in Morgan Stanley's synergy targets is revenue, which would provide upside.
We see two implications from this deal on wide-moat Charles Schwab and narrow-moat TD Ameritrade. The first is negative in that it takes away a merger with E-Trade as a backup plan for Schwab if its merger with Ameritrade falls through because of overconcentration in Registered Investment Advisor market share. The second is positive in that it provides an example for regulators that the investment-services industry is competitive and lines between business models are blurring.
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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.