• KCL M&A Society

Morgan Stanley acquires investment manager Eaton Vance


By Taran Narula, Head of FIG at the KCL M&A Society


DEAL INTRODUCTION

Acquirer: Morgan Stanley

Target: Eaton Vance Date of Announcement: 8 October 2020


Morgan Stanley (“MS”) has agreed to acquire investment management firm Eaton Vance (“EV”) in a stock plus cash transaction for approximately $7 billion, a deal that fuses two businesses with different but complementary strengths and creates a single entity with $1.2 trillion in assets. The announcement of this deal represents the latest step in CEO James Gorman’s vision to rebalance Morgan Stanley’s core business towards lower risk revenue streams and away from its traditional capital markets activities.


The deal is expected to close in Q2 2021. Eaton Vance’s shareholders will receive $28.25 in cash and 0.5833 Morgan Stanley shares per share held, representing a 38% premium over Eaton Vance’s share price at the time of the announcement.


COMPANY INTRODUCTION


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Morgan Stanley

Founded: 1935

CEO: James Gorman

HQ: New York City, NY, US

Ticker: $MS

Share Price at the time of writing: $69.49

Market Cap at the time of writing: $124B

Key shareholders: MUFG Bank (20.84%), State Street Corporation (6.14%), The Vanguard Group (5.12%), Blackrock Inc (5.12%)


Financial data

EV: N/A

LTM Revenue: $45.4B

LTM EBITDA: N/A

LTM EV/Revenue: N/A

LTM EV/EBITDA: N/A


Morgan Stanley is a multinational investment bank and financial services company headquartered in New York City. A member of the Fortune 500, its main areas of business are institutional securities, wealth management, and asset management.


Morgan Stanley’s strategic aim is to transform its offerings into three world-class businesses of scale in these main areas. Following the 2008 financial crisis, Morgan Stanley’s securities-heavy income stream took a massive hit and the bank faced considerable difficulties attempting to rebound. It has since attempted to reposition itself as a market leader within the realm of money management; to this end, it recently acquired electronic brokerage platform E-Trade to supplement its wealth management suite.



Photo: Wikimedia (https://commons.wikimedia.org/wiki/File:Eaton_Vance_Logo.svg)


Eaton Vance

Founded: 1979

CEO: Thomas Faust

HQ: Boston, MA, US

Ticker: $EV

Share Price at the time of writing: $68.50

Market Cap at the time of writing: $7.7B

Key shareholders: The Vanguard Group (8.71%), Blackrock Inc (8.58%), State Street Corporation (7.49%), Wells Fargo & Co (4.76%)


Financial data

EV: $9.5B

LTM Revenue: $1.73B

LTM EBITDA: $406M

LTM EV/Revenue: 5.5x

LTM EV/EBITDA: 22.1x


Eaton Vance is an investment management firm that administers financial products such as mutual funds and provides investment management and advisory services to individuals and institutional clients. Established in 1924, it is one of the oldest investment companies in the US and has an AUM (assets under management) of approximately $507.4 billion.


DEAL MOTIVATIONS

Better position to compete

One of the key consequences of the acquisition is that it will almost double the size of Morgan Stanley’s investment management arm (“MSIM”) to approximately $1.2 trillion in assets: $715 billion from MSIM and $507.4 billion from Eaton Vance. This is a welcome development: in recent times, mid-sized investment management firms and arms of investment banks have lagged behind the “growing might” of mammoth institutions Blackrock and Vanguard, which manage assets totalling $7.8 trillion and $6.2 trillion, respectively. By combining forces and substantially increasing its assets under management to a more competitive level, MSIM will be better positioned to take on these institutions and its key banking rivals in the space.


Indeed, although MSIM head Dan Simkowitz has said that competition implications were not a primary consideration of the acquisition, the deal follows widespread consolidation across the mid-sized investment management industry: notably, the merger of Standard Life and Aberdeen in 2017, Invesco’s acquisition of Oppenheimer in 2019, and Franklin Templeton’s purchase of Legg Mason in 2020. Furthermore, Morgan Stanley has long struggled to match its rivals’ wealth management growth rates; last year, the bank had one of the lowest wealth management client asset growth rates of major US financial institutions. The purchase of Eaton Vance could therefore be an attempt to trigger MSIM’s afterburners and avoid being left further in the dust by its rivals. Morgan Stanley said it expects to realise approximately $150 million in annual savings in addition to 4% lower costs of its investment management arm, which may also assist growth rates on the books.


Lower risk, greater stability

Following the 2008 financial crisis, Morgan Stanley CEO James Gorman has attempted to reposition the bank’s income streams “away from its heavy reliance on volatile investment bank revenues to one with more stable revenues driven by wealth and asset management.” The aim of this strategy is to insulate the bank from volatility and “weak periods” for its trading and investment banking arm. The acquisition of Eaton Vance is perhaps the last piece of Morgan Stanley’s money management puzzle: it will move the bank further towards recurring income, which is expected to further improve stability in the long run. The deal is not only expected to boost the business’s annual revenue by one-third but will also mean that Morgan Stanley manages $4.4 trillion across its management businesses.


Gorman’s vision is already close to fruition: the bank’s wealth and investment management arms already make up approximately 50% of total revenue. Even amidst market volatility induced by the COVID-19 pandemic, Morgan Stanley was the only major Wall Street bank to post an earnings rise in Q2 2020. Morgan Stanley further enhanced its wealth management offerings in October 2020 by completing the acquisition of electronic brokerage platform E-Trade in an all-stock deal worth $13 billion, the largest by a US bank since the crisis. The Eaton Vance deal is likely to increase the proportion of revenue accounted for by Morgan Stanley’s management businesses and thereby reduce the proportion made up by trading and investment banking. This will ensure greater stability and lower risk.


Scale and distribution opportunities

Just 5% of Eaton Vance’s sales in the first half of 2020 were international; in comparison, international sales represented nearly two-thirds of Morgan Stanley’s investment management arm’s (“MSIM”) gross sales over the same time period. The acquisition may therefore enhance distribution capabilities by enabling MSIM to leverage its international reach and push Eaton Vance products above and beyond their traditional US base. The deal, therefore, solves a “strategic sticking point” for Eaton Vance: international distribution of its products.


Furthermore, although the two firms have different focuses (Morgan Stanley’s investment deals more with institutions; Eaton Vance with intermediaries), the lack of overlap may facilitate smoother integration and a more complementary business model: like joining “puzzle pieces”. Notably, Morgan Stanley does not plan to change how Eaton Vance and its affiliates operate and invest, suggesting that the latter is likely to have autonomy albeit under the bank’s investment management arm. Importantly, Morgan Stanley was previously a distributor of Eaton Vance’s funds and is therefore well aware of its business model. The consequently larger, more robust investment management business and diversified product suite, as well as the “plug-and-play” nature of the deal, may therefore enhance earning capabilities at MSIM.


RISKS/UNCERTAINTIES

As with any acquisition, it remains to be seen whether Morgan Stanley is able to efficiently absorb Eaton Vance into its fold. The savings, benefits, and synergies the bank hopes to achieve will be futile if it cannot do so in an efficient manner.


Morgan Stanley is also taking on enormous risks by staking so much on money management. When this deal is completed, it would have spent $20 billion on wealth and asset management acquisitions. While this approach has proven fruitful and has engendered greater stability so far, there are questions about whether the bank is playing it too safe. Although rival investment banks are also building more robust wealth and asset management businesses (a la Goldman Sachs’ Marcus business), Morgan Stanley could be missing out on more efficient means of - the greater the risk, the greater the reward.


The Eaton Vance deal is also a 50% cash acquisition. Coupled with the $13 billion in cash spent on E-Trade, this deal represents a significant cash outlay for Morgan Stanley. Spending vast amounts on acquisitions that are only expected to realise their synergies in the long run - especially amidst current economic uncertainty - is an enormous risk that could end up shooting them in the foot. Moreover, Morgan Stanley is paying a significant premium for Eaton Vance. The $56.50 per Eaton Vance share that Morgan Stanley will pay for Eaton Vance represents a 40% premium over its share price at the time of the announcement. Consequently, despite the purported benefits, there are serious questions as to whether the bank is paying far too much for the investment manager.


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