UPDATE 3-Morgan Stanley's Gorman charts ambitious course with $13 bln E*Trade deal

Morgan Stanley said on Thursday it would buy discount brokerage E*Trade Financial Corp in a stock deal worth about $13 billion, the biggest acquisition by a Wall Street bank since the 2008-2009 financial crisis. Part of a broader consolidation in the discount brokerage sector, the move will add breadth to Morgan Stanley's wealth management unit, a business that Chief Executive Officer James Gorman has been trying to build out to insulate the bank from weak periods for trading and investment banking.

Morgan Stanley will get E*Trade's more than 5.2 million client accounts and $360 billion of retail client assets, and the brokerage's CEO, Mike Pizzi, will continue to run the business following the merger. "The addition of E*Trade's products and iconic brand will serve as a leap forward" for the bank, said Gorman on a call with analysts.

"The transaction immediately fills in product and service gaps." The deal is almost sure to test regulatory waters in Washington, although Gorman brushed off any concerns around potential hurdles.

"We wouldn't be entering into this (the deal) if we didn't think from a regulatory perspective this would be viewed favorably," said Gorman. E*Trade shareholders will get 1.0432 Morgan Stanley shares for each share as part of the deal. That translates to $58.74 per share - a premium of 30.7% to the last closing price of E*Trade shares.

Morgan Stanley shares were down 5%, while E*Trade rose 24% and its shares were hovering around the offer price. "While the strategic fit is strong, the stock is down ... reacting to the premium paid," Citi analyst Keith Horowitz wrote in a note this morning.

GORMAN'S BUYOUT STRATEGY Since taking over a decade ago, Gorman has pulled off multiple big acquisitions. He orchestrated the bank's takeover of Smith Barney, making wealth management the cornerstone of his plan to stabilize revenue.

E*Trade, which became popular nearly two decades ago with commercials that blasted financial advisers for high fees, had been under the gun as the online trading space became more competitive with increased cut-throat pricing. Its revenue growth had also taken a hit in recent years from the emergence of digital upstarts called Robo advisers, falling commissions and lower interest rates.

Late last year, its biggest rival Charles Schwab Corp agreed to buy TD Ameritrade Holding Corp for $26 billion. Pressure on the discount broker business model has been rising in recent years, as companies spend more on their trading platforms to keep up with technological advances while lowering fees to attract more customers.

Morgan Stanley executives said they expect the deal initially to dilute its earnings per share by around 10% and make money by 2023. The company expects to save $400 million in costs from the deal. The deal is expected to close in the fourth quarter of 2020.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)