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Why Morgan Stanley's $7B Eaton Vance Deal Surprised Analysts

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Morgan Stanley CEO James Gorman (Photo: Al Drago/Bloomberg)

Morgan Stanley’s agreement to buy asset manager Eaton Vance for $7 billion is just the latest example of increasing consolidation in the financial services industry, several industry analysts say. Still, the development did catch them off guard. 

(Related: Morgan Stanley to Acquire Eaton Vance in $7B Deal)

“That Eaton Vance was willing to sell was a surprise to us as we have viewed the company as one of the better positioned traditional managers given its customized portfolio business [Parametric], ESG business through Calvert and diversified fixed income, franchise, including other strategies,” said Keefe Bruyette & Woods analysts Robert Lee and Jeffrey Drezner, in a note.

Others agreed.

“We did not expect to see a more traditional asset manager like narrow-moat-rated Eaton Vance being taken out by one of the investment banks … ,” explained Morningstar sector strategist Greggory Warren. (Morningstar defines narrow moat companies as ones that can fend off competition for as long as 10 years.)

The investment banks “have been far more focused on their brokerage and wealth-management businesses the past decade, with some even shedding their asset-management units in the aftermath of the 2008-09 financial crisis,” Warren said.

Morgan Stanley’s plan to buy Eaton Vance comes just days after the firm finalized its $13 billion acquisition of discount brokerage E-Trade and Schwab completed its $22 billion acquisition of TD Ameritrade.

Also recently, Trian Fund Management took a 9.9% stake in both Invesco and Janus Henderson with the hope of merging the two firms to better compete against giant asset managers like BlackRock.

Now, the industry can add another powerhouse to the list. With the addition of Eaton Vance, Morgan Stanley will oversee $4.4 trillion of client assets  across its wealth management and investment management segments.

(See: Here’s the Firm Buying Stakes in Invesco and Janus Henderson)

Morgan Stanley now has “three world-class businesses of scale,” said Gorman:

  • Institutional securities with 14% of market share as of 2019 and about $20 billion in net revenues;
  • Wealth management with $3.3 trillion in client assets on a pro forma basis after the E-Trade acquisition and about $21 billion in pro forma net revenues; and 
  • Investment management with $1.2 billion in assets under management on a pro forma basis after the Eaton Vance deal is completed, which should provide the firm with an additional $5 billion in pro forma net revenues.

CFRA Analyst Kenneth Leon concurs with Gorman’s assessment. He wrote a note saying that Morgan Stanley’s acquisition of Eaton Vance, which has $500 billion in assets under management, “advances Morgan Stanley’s strategy to scale fee-based businesses to drive stable, recurring revenue.

“We see the deal expanding Morgan Stanley’s best-in-class ranking in investment banking, as well as investment and wealth management …. AUM. We think the Morgan Stanley brand will strengthen the four disparate asset managers under Eaton Vance that include Parametric, Calvert, E/V/M, and Atlanta Capital,” Leon said.

Leon views the Eaton Vance acquisition as “complementary with more scale across all investment classes, especially fixed income/municipal income funds, sustainability, and customized portfolio solutions.”

In its upgrade of Morgan Stanley’s long and short-term senior unsecured debt following completion of E-Trade acquisition, Moody’s senior vice president Donald Robertson said the E-Trade purchase also was “another deliberative step in [the firm's] clear and consistent strategy to shift its business mix towards generating recurring, profitable revenue-streams in wealth and investment management.”

He continued: These revenue-streams are generally more stable and of lower risk than the activities and exposures in MS’s institutional securities’ business segment.”

(Related: Morgan Stanley to Complete E-Trade Purchase Oct. 2)


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