By Alexander Bergmüller & Friedrich von Storch (IE Business School), and Mariona Planella Boix (ESADE Business School)
Overview of the deal
Acquirer: Morgan Stanley
Target: Eaton Vance Corp.
Implied Equity Value: $7 billion
Announced date: October 8th, 2020
Closing date of the deal: Q2 2021
On October 8th, Morgan Stanley has announced the acquisition of the investment management company Eaton Vance for $7bn, paid in cash and shares. After this deal, Morgan Stanley will oversee $4.4 trillion of client assets and AUM across Wealth Management and Investment Management segments, doubling its Investment Management business to a size of $1.2 trillion. This deal represents the next step in Morgan Stanley’s strategic transformation to safer businesses after it closed a $13bn deal to buy online brokerage E-Trade some weeks ago and after its $900m acquisition of employee stock plans manager Solium less than two years ago. As a result of the deal, Eaton Vance’s shareholder will receive $28.25 per share in cash and 0.5833x of Morgan Stanley common stock. The deal has a clear underlying strategic rationale, aiming towards better positioning the bank to compete against passive fund houses such as BlackRock and Vanguard, as well as the asset management arms of rival banks JPMorgan and Goldman Sachs.
“Eaton Vance is a perfect fit for Morgan Stanley. The deal provides quality, scale and the value-added fixed income business and enhances our client reach” - Morgan Stanley CEO and chairman James Gorman
Company Details: Acquirer – Morgan Stanley
Morgan Stanley is a financial holding company that provides various financial products and services to corporations, governments, financial institutions, and individuals in the Americas, Europe, the Middle East, Africa, and Asia. The company operates through Institutional Securities, Wealth Management, and Investment Management divisions. The Investment Management unit provides various investment strategies and products comprising equity, fixed income, liquidity, and alternative/other products to benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, and third-party fund sponsors and corporations through a network of institutional and intermediary channels.
Founded in 1924, headquartered in New York, USA
CEO and Chairman: James Patrick Gorman
Number of employees: 61,600
Market Cap: $88.60 billion (as of October 9th, 2020)
EV: $197.64 billion
LTM Revenue: $ 43.79 billion
LTM EBITDA: N/A
LTM EV/Revenue: 11.2x
LTM EV/EBITDA: N/A
Company Details: Target - Eaton Vance
Eaton Vance Corp. engages in the management of investment funds and provides counselling services. It offers a range of engineered portfolio implementation services, including tax-managed core and specialty index strategies, futures and options-based portfolio overlays, and centralized portfolio management of multi-manager portfolios.
Founded in 1924, headquartered in Boston, Massachusetts, USA
CEO: Thomas E. Faust Jr.
Number of employees: 1.870
Market Cap: $6.953 billion (as of October 9th, 2020)
EV: $8.352 billion
LTM Revenue: $1.71 billion
LTM EBITDA: $610 million
LTM EV/Revenue: 4.1x
LTM EV/EBITDA: 12.6x
Projections and Assumptions
In an industry that is increasingly driven by scale and, as a consequence, has seen a wave of mergers directed to cutting costs and improving margins, the transaction will see Morgan Stanley’s investment management business grow significantly, doubling its assets under management to $1.2 trillion and revenue to $5 billion. As a result, the bank will be able to strengthen its position in the sector and fight-off the fierce competition from global players such as passive fund giants Blackrock and Vanguard, as well as the asset management divisions of rivals Goldman Sachs and JPMorgan.
Morgan Stanley also wants to take advantage of the high profit margins in the asset management industry that remain fruitful despite the strong pressure on fees by passively managed investors.
Moreover, the deal complements Morgan Stanley’s existing product portfolio and adds institutional capabilities besides expertise in particular products in which it is weaker. In fixed income, where the bank has expertise but lacks scale, the acquisition significantly expands the balance sheet and extends Morgan Stanley’s access to debt-securities. Additionally, Eaton Vance brings along an extensive knowledge in the management of municipal bond portfolios. Likewise, the transaction enables the company to offer new products in environmental, social and governance (ESG) investing.
Last but not least, there is a great fit and it is a true win-win situation. Morgan Stanley has been the main distributor of Eaton Vance’s funds and thus knows their business very well. Morgan Stanley can take Eaton’s products internationally while it can put its own products using Eaton Vance’s wholesale network.
The deal is in line with Morgan Stanley’s long-term vision of reducing the dependence on volatile investment banking revenues to one with more reliable and fee-based revenues driven by asset and wealth management. After initiating the strategy-shift in 2009 with the acquisition of Smith Barney from Citigroup in the midst of the financial crisis, this transaction, for the time being, marks an end to Morgan Stanley’s buying spree in both sectors, after recently spending $13 billion on E-Trade in February 2020 and now $7 billion on Eaton Vance. Following the close of the transaction, Morgan Stanley will make more than half of its revenues from dependable fees related to asset and wealth management, thus creating the largest business of its kind in the world by revenue with $26 billion in revenue and $4.4 trillion in total assets under management. Furthermore, the recent acquisitions enable Morgan Stanley, already the largest distributor of Eaton Vance funds through its retail wealth-management division, to leverage its multitude of financial advisors to distribute the $1.2 trillion worth of mutual funds and further grow the divisions.
In addition, it is expected that Morgan Stanley can benefit from cost synergies of $150 million annually, being able to cut about 4% of the combined expense base. In the short term, the bank does not expect any effects on earnings per share but in the long term, the deal is expected to be marginally accretive on earnings.
Morgan Stanley’s CEO, James Gorman, also expects that the nature of the deal facilitates a successful integration of the merger. Since the acquisition is not focused on scale but rather on complementing the existing product offering, the limited overlap can reduce friction.
Risks and Uncertainties
In terms of the timing, the share price of Eaton Vance is up a huge amount meaning that Morgan Stanley is paying quite a big premium for it. Morgan Stanley is paying $56.50 per Eaton Vance share in cash and stock, roughly 40% above the fund manager’s closing price Wednesday October 7th, 2020. While the E-Trade acquisition was an all-stock deal, Morgan Stanley is now paying 50% of the acquisition in cash. Deploying so much cash when there are so many uncertainties and economic turmoil can be seen as a big risk.
Another issue is the current trend in asset management when it comes to fee compression. It is clearly essential that the business is scale-driven. Morgan Stanley sold its private banking division in Europe because it did not have the scale. Even though CEO James Gorman clearly mentioned that Morgan Stanley’s goal is not to be in every market, it yet remains to be seen if it can efficiently compete in this defiant market environment.
After Eaton Vance, Morgan Stanley is done with deals for a while. The bank will focus on incorporating all the companies it has bought and finding ways to make them gel with one another, potentially missing out on even more promising opportunities. Successfully integrating Eaton Vance into the Morgan Stanley corporate culture will be challenging and there is the risk of paying too little attention to culture and change management. With all the uncertainty and movements in the markets, realizing the expected synergies and creating shareholder value is more difficult than ever. The current pandemic proves this - it has caused significant and unforeseen shifts and delays in the M&A landscape and will undoubtedly have ripple effects throughout the market and overall economy for years to come.
“By joining Morgan Stanley, we will be able to further accelerate our growth by building upon our common values and strengths, which are focused on our commitment to investment excellence, innovation and client service. Bringing Eaton Vance’s leading brands and capabilities under Morgan Stanley creates a uniquely powerful set of investment solutions to serve both institutional and retail clients in the U.S. and internationally.” – Eaton Vance CEO Thomas E. Faust, Jr.