Sharp left on Wall Street onto Main Street... The intersection Morgan Stanley just landed on by buying E-Trade. MS is an OG Wall Street bank that has historically done big deals for large institutional clients, corporations, and million/billionaires. But it just dropped $13B for a discount online broker. Why?
- Main Street push: MS wants to manage money for regular people — it thinks gaining retail investors will be a more durable (and less risky) biz model.
- What E-Trade brings: 5M retail customers and their $360B in assets (an average of $72K per customer). MS will also get E-Trade's online banking biz, which is clutch.
Wall Street thought E-Trade was a goner... E-Trade used to make 18% of its revenue from stock trade commissions ($7 on each buy and sell). But after Robinhood introduced commission-free trading in 2013 (disclosure: that's us), brokerages were under pressure to go to $0. In October, Schwab ended its commission fees, and E-Trade kinda had to follow. Its stock plunged 14% that day as a big source of revenue was erased. But MS still sees strength in E-Trade...
- So it's paying a huge premium to buy E-Trade — 34% more than its October value before its commissions got killed.
- E-Trade shareholders celebrated (its stock rose 22% yesterday). It wasn't so cool for MS shareholders (MS fell 5%).
This deal saves MS loads of time... and time is money. Goldman Sachs — MS' arch rival — has spent 4 years trying to become a retail bank with its Marcus savings account — and it's still losing money on that unprofitable division. Making a product/market shift takes time for any business. But by acquiring E-Trade, MS just became a retail bank overnight — and it's already profitable on day 1.