The deal, coming on the heels of the Wall Street giant’s purchase of discount broker E*Trade, marks another step in its retreat from its somewhat swashbuckling pre-financial-crisis persona, when it made much of its money from risky trading. And it fits in with a wave of consolidation reshaping the money-management industry.
Combined, Morgan Stanley (ticker: MS) and Eaton Vance (EV) would generate $26 billion in annual pro forma net revenue, much of it from steady fee income for overseeing $1.2 trillion in assets and providing associated services.
Eaton Vance has a strong lineup of mutual funds offered under its own name, many focused on fixed income. It also owns the Calvert Research & Management funds, which specialize in sustainable investments; Parametric, which provides customized indexes and other tools for investors; and Atlanta Capital, a firm that invests in small- and mid-cap stocks. All could benefit from having their offerings integrated into Morgan Stanley’s powerful international distribution network. Eaton Vance is also strong in domestic distribution to intermediaries, such as financial advisors, and owns an in-house advisory firm, Eaton Vance Investment Counsel.
The acquisition is expected to close in mid-2021. For each Eaton Vance share, an investor would get 0.5833 of a Morgan Stanley share, plus $28.25 in cash. Based on Morgan Stanley’s recent stock price, this totals $56.50. Eaton Vance holders would also get a one-time special cash dividend of $4.25 per share from that company, paid before the closing.
On a conference call, CEO James Gorman expressed hope that the deal would boost Morgan Stanley’s valuation. “Our competitor Charles Schwab [SCHW] is trading at 20 times earnings, and we’re trading at 10 times earnings…If we traded at 14 to 15 times earnings, this stock would be a hundred bucks.”
On Thursday, Eaton Vance, one of the few traditional money managers showing organic growth, closed at $60.65—almost perfectly matching the deal price, plus the special dividend—up from a preannouncement $40.94. Morgan Stanley ended at $49.18, virtually unchanged.
Industry consolidation is being propelled by pressure that active money managers are under to lower fees, at a time when many have underperformed passive investments, leading investors to withdraw assets. Bigger companies can trim expenses through economies of scale.
Says Ali Dibadj, head of finance and strategy at AllianceBernstein, an investment manager 60% owned by Equitable Holdings (EQH): “There will be more big deals in the asset-management industry, as some firms throw in the towel on delivering alpha [outperformance] for clients.” (For a look at AllianceBernstein itself, see “Asset Managers Are Under Pressure. AllianceBernstein Is Different—and It’s Our Stock Pick.”.)
Recently, Trian Partners, the activist investor, took 9.9% stakes in both Invesco (IVZ) and Janus Henderson Group (JHG), with an eye to creating an asset-management giant. In 2019, Trian CEO Nelson Peltz took a stake in Legg Mason. In 2020, Franklin Resources (BEN) bought Legg, giving Peltz a 55% return on his investment.
What firms might be the next targets?
Rob Lee, an analyst at KBW, thinks that speculation might center on BrightSphere Investment Group (BSIG) and Waddell & Reed Financial (WDR). Shares of both asset managers were up substantially on the Morgan Stanley news. Neither BrightSphere nor Waddell returned requests for comment.
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