Banking & Finance

Why Morgan Stanley Is Paying Such a High Premium for Eaton Vance

Just days after completing its acquisition of E*Trade, Morgan Stanley (NYSE: MS) announced Thursday that it has signed an agreement to acquire financial services firm Eaton Vance Corp. (NYSE: EV) in a cash and stock transaction valued at around $7 billion.

Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833 shares of Morgan Stanley common stock for each share they own. The stock portion of the deal, also valued at $28.25 per share, brings the per-share total to $56.50, a premium of 38% to Wednesday’s closing price of $40.94 for Eaton Vance shares.

Eaton Vance also will pay its shareholders a special dividend of $4.25 per share “from existing balance sheet resources” before the transaction closes.

Last Friday, Morgan Stanley completed its $13 billion, all-stock acquisition of E*Trade, a move designed to bolster the bank’s wealth management business. The acquisition of Eaton Vance represents a second shot at the same target.

Morgan Stanley CEO James Gorman noted that adding Eaton Vance would drive the big bank’s assets under management total to $4.4 trillion in its wealth management and investment management segments. The acquisition of E*Trade added $2.7 trillion in client assets to Morgan Stanley’s already formidable $1.2 trillion total, and Eaton Vance will bring another $500 billion to the party.

Gorman said, “This transaction further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class investment banking and institutional securities franchise.”

Where the deal for E*Trade added more than 5.2 million client accounts to Morgan Stanley’s base, Eaton Vance brings between 40,000 and 50,000 clients to the bank’s wealth management business. Taking the midpoint, each Eaton Vance client is worth about 115 E*Trade clients. Those fees that Gorman is counting on had better be large.

Morgan Stanley stock fluttered around the break-even line in early trading Thursday, at $48.59, after closing at $48.71 Wednesday evening. The stock’s 52-week range is $27.20 to $57.57 and the consensus price target on the stock is $59.76. The bank’s dividend yield is 2.87%.

Eaton Vance traded up more than 46% at $59.95, after posting a new 52-week high of $60.75. The stock’s 52-week low is $23.59. The firm paid a dividend yield of 3.74%.

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