Morgan Stanley Asks E-Trade to Dance

With a plus 20% jump in its share price, E-Trade (NASDAQ: ETFC) was the standout performer in the S&P 500 on Wednesday after Morgan Stanley (NYSE: MS) announced their purchase of the online broker for a cool $13 billion. Few will be surprised that E-Trade is getting picked up, given how quickly the big trading names have swallowed up the more niche ones after the race to zero commissions intensified last fall.

For the past couple of months, the rumors on Wall Street were that Goldman Sachs (NYSE: GS) would be the buyer and it will be interesting to learn in the coming days how and why Morgan Stanley pipped them at the post. The acquisition will be the biggest deal by a US bank since the 2008 crash and Morgan Stanley is expecting good things to happen as a result. For example, they’re forecasting an extra $400 million in revenue from cost cuts and another $150 million saved via E-Trades low-cost deposit structure. They’ll also gain E-Trade’s 5 million online customers and over $350 billion in assets.

Good Timing

Fundamentally as well, it looks as if this is a good time to be picking up E-Trade. Earlier this month, their daily average revenue trades showed a 19% jump from December’s number and an even more impressive 68% jump from January 2019’s number. New retail accounts were also up 28% and 18% over the same time periods respectively. E-Trade’s Q4 earnings release in January was better than expected. Non-GAAP EPS beat analyst expectations and while revenue contracted over 7% year on year, it was still better than the consensus.

The acquisition is probably a best-case scenario for E-Trade investors. As we noted last month, “the race towards the bottom between online stockbrokers and their commissions ramped up a gear in October when Schwab (NYSE: SCHW) announced they were scrapping all commissions on stock trades. Since the likes of Robinhood burst onto the brokerage scene with a no-fees mission in 2013, the more traditional brokers like Schwab, TD Ameritrade (NASDAQ: AMTD) and E-Trade (NASDAQ: ETFC) have struggled to remain attractive to newer traders or those with smaller accounts. It felt like the levee broke in October when, like dominoes, they and many others announced they would no longer charge fees on stock trades.”

As the dominoes fell, so did the stock prices of the online brokers. E-Trade’s shares plummeted 20% in the days following Schwab’s move while the latter’s stock also tanked, as did TD Ameritrade’s. In the aftermath of this massive industry shift, the big numbers were crunched and moves were quickly made. Schwab swung first and swallowed up TD Ameritrade at the end of November for $26 billion. While E-Trade’s shares had recovered the ground lost during the initial dip lower in early October, their performance so far in 2020 made them look like they didn’t really want to go much higher so investors will surely be popping bottles tonight.

Who’s Next?

It’s worth noting Morgan Stanley’s stock was out of favor with the news and came off about 5% during Thursday’s session. This is likely just a minor blimp as the news and figures are digested. Their shares are still trading right up at decade highs.

Looking ahead, there’s probably not much of a play to be had with E-Trades shares as the deal is finalized and confirmed but investors would do well to keep an eye on the other online brokers out there. The industry is clearly moving in a certain direction and a well-placed position could yield attractive returns with the right kind of news.