![](https://images.thinkadvisor.com/contrib/content/uploads/sites/415/2020/02/359000311-4.jpg)
Morgan Stanley’s merger a quarter century ago with a brokerage that had branches in Sears was met with sneers. Wall Streeters joked it was a deal combining white shoes with white socks.
But with the painful Dean Witter Discover deal now ancient history, the firm is taking another stab at luring mom-and-pop investors: a $13 billion acquisition of E-Trade Financial Corp., the discount brokerage that shot to prominence in the day-trading heyday of the 1990s.
Like his predecessors, Chief Executive Officer James Gorman is using mergers to reshape the bank for a daunting new era. Morgan Stanley’s tie-up with Dean Witter Discover in 1997 was followed by the purchase of Smith Barney in 2009, a deal that cemented its pivot to managing people’s money as a source of growth.
“I worked for a guy who used to say there is no birth without blood and pain,” former CEO Phil Purcell, who left Morgan Stanley in 2005, said in an interview. “Dean Witter was painful. Smith Barney was very painful. It was also the right strategic move.”
And the roughly 30% premium Morgan Stanley is dishing out for E-Trade?
“They are paying a premium for a company that is a fraction of market value,” the 76-year-old former CEO said. In 1999, “there were people who were gods on Wall Street at the time saying we should acquire Charles Schwab. That would have been a catastrophe,” he said, referring to Schwab’s valuation relative to Morgan Stanley.
“Everything James Gorman has done has been right,” Purcell said.
Big financial companies are in a race to lure small investors with digital services that many view as the industry’s future. Goldman Sachs Group Inc. is making its first forays into the world of retail finance, and even itself considered a deal with E-Trade before giving it a pass, according to a person with knowledge of the matter.
Skeptical Investors
Morgan Stanley’s E-Trade takeover is the industry’s biggest since being saddled with regulations that crippled some of its signature businesses in the wake of the financial crisis.
Gorman spent his first decade atop Morgan Stanley reshaping the white-shoe firm into a wealth-management colossus that’s tried to diminish its exposure to the vagaries of the trading and investment-banking operations that dominate Wall Street.
Now he’s taking a leap into a digital-banking future that could draw in millions of customers and give Morgan Stanley a springboard to go international with new banking products.