Morgan Stanley to Acquire Eaton Vance

We've been big proponents of consolidation among the U.S.-based asset managers, expecting companies to pursue enhanced scale as a means of offsetting the impact of fee and margin compression driven by the growth of low-cost passive products. However, we did not expect to see a more traditional asset manager like narrow-moat-rated Eaton Vance EV being taken out by one of the investment banks, which have been far more focused on their brokerage and wealth-management businesses the past decade, with some even shedding their asset-management units in the aftermath of the 2008-09 financial crisis.

Narrow-moat MS Morgan Stanley, though, has been actively seeking to push its asset-management unit above the $1 trillion mark, with CEO James Gorman alluding to the company's 2009 sale of its Van Kampen fund operations to Invesco as a mistake. The lure of the asset-management business for an investment bank is that it is asset-light and tends to generate a steady stream of fees, albeit more heavily correlated to equity and credit market returns.

According to the terms of the deal, which is expected to close by the end of the second quarter of 2021, Eaton Vance shareholders will receive $28.25 per share in cash, along with 0.5833 share of Morgan Stanley common stock for each share held. This values Eaton Vance at $56 per share based on Oct. 7 closing prices. At nearly 14 times average annual EBITDA over the past five years, the deal represents a bit of a premium, as it is well above the median run-rate EBITDA transaction multiple of 10 times we've seen for asset manager deals during the past decade.

Much as we did with narrow-moat Franklin Resources' purchase of Legg Mason earlier this year, we expect to adjust our Eaton Vance fair value estimate to the takeout price, as we see few impediments to the deal getting done. However, we will continue to model Eaton Vance as a stand-alone company and provide that fair value estimate to investors as well.

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