What's going on?
Investment bank Morgan Stanley announced one small, $13 billion step of buying online brokerage E*TRADE, in hopes it’ll be one giant “leap forward” for its business.
What does this mean?
Since 2008’s financial crisis, some of the riskier aspects of investment banking – like trading – have lost their luster. That’s why lots of banks have spent the last few years diversifying their businesses in search of stable, recurring revenues. Goldman Sachs, for instance, is trying to become a consumer bank, while JP Morgan is experimenting with payments.
For Morgan Stanley, wealth management is the name of the game: the segment – which invests rich people’s money on their behalf – now accounts for almost half the firm’s revenue. But there’s money to be made in catering to the not-quite-so-rich, too. Hence E*TRADE: its five million customers and $360 billion worth of assets mean Morgan Stanley will soon manage over $3.1 trillion for wealth management clients. That could help give the bank an edge over its peers, sure, but it’s already helped E*TRADE’s investors either way: they’ll receive a payout worth 30% more than the firm’s shares cost before the deal was announced.
Why should I care?
For markets: Engage corp speed.
There’s more to E*TRADE than just an eye-catching wealth management service: the brokerage has a big employee stock management business too. In other words, when workers get paid in stock, E*TRADE looks after it – before hopefully converting those workers into brokerage customers further down the line. Morgan Stanley already owns a similar business, so with E*TRADE’s extra oomph, it’ll now boast 4,000 corporate customers.
Zooming out: Phew.
For E*TRADE’s investors, the deal will likely come as a relief. The company’s been in turmoil ever since Charles Schwab instigated a commission price war. Years of low interest rates haven’t helped either: E*TRADE makes 67% of its revenue from investing customers’ cash. Being part of something bigger, then, really could be better.