Why Morgan Stanley's $7 billion bid for a storied asset manager gives it a 'remarkable leg up' on rivals and signals more deals to come

  • Morgan Stanley will buy asset manager Eaton Vance in a deal valued at $7 billion, the firms said on Thursday, in the latest sign of widespread consolidation in the money-management industry. 
  • The deal beefs up Morgan Stanley's position in customizable fund offerings and sustainable investments through Eaton Vance's affiliates, industry analysts and consultants said in interviews.
  • One East Coast-based Morgan Stanley financial advisor told us that he was most interested in the fixed-income capabilities Eaton Vance could bring to the firm, along with its Parametric mutual funds. 
  • Morgan Stanley's move underlines its own transformation and the realities of pressured mid-sized asset managers that need size to survive. 
  • On a conference call to discuss the deal with analysts on Thursday morning, CEO James Gorman said the tie-up fit into Morgan Stanley's shift to "more balance sheet-light, more durable businesses."
  • Visit Business Insider's homepage for more stories.

Sustainable investing, big stable businesses, utter size, and tailored products for investors: Morgan Stanley's move to buy Eaton Vance at a premium is a deal made for modern Wall Street.

The New York investment bank said Thursday it would acquire the Boston-based investment manager, which oversees some $500 billion in assets, and its affiliates in a deal worth $7 billion in cash and stock.

Coming just six days after Morgan Stanley closed on its all-stock E-Trade acquisition, the deal highlights the bank's transformation toward more stable operations from once-core sales and trading under Chief Executive James Gorman within an industry that has shifted significantly since he took the reins a decade ago.  

The tie-up would create a $1.2 trillion asset management behemoth alongside Morgan Stanley Wealth Management, one of the largest wealth managers in the world with 15,400 financial advisors and nearly $2.7 trillion in client assets as of the end of June.

Eaton Vance would beef up Morgan Stanley's position in customizable fund offerings, with Eaton Vance's Parametric funds, and sustainable investments, through its well-known Calvert investment manager and research business, industry analysts and consultants said in interviews. 

Read more: Morgan Stanley snaps up asset manager Eaton Vance in $7 billion takeover as its buying spree continues

"Gorman's strategy over the last 10 years, but especially in recent years, has been to enhance its wealth and investment management position," Ken Leon, a bank analyst and director of equity research with CFRA Research in New York, said in a phone interview on Thursday. 

"But in terms of scaling investment management with funds, it would be difficult to do that organically. With acquisitions, they are able to move up the league tables in terms of asset management," Leon said. 

For Morgan Stanley, pairing its monster force of advisors with more products  

On a conference call to discuss the deal with analysts on Thursday morning, Gorman said the tie-up fit into Morgan Stanley's shift to "more balance sheet-light, more durable businesses." Gorman has previously emphasized wealth management's stabilizing effect on the bank, which was in dire straits coming out of the great financial crisis. 

Its wealth business is known as a global force. But by size, its $665 billion asset management business isn't the same titan as the largest asset managers like BlackRock (managing some $7.3 trillion assets) and Vanguard (with some $6.2 trillion at the start of the year). 

"I think it gives it a somewhat remarkable leg up on the competition," said Neil Bathon, the founder of asset management research and consulting firm FUSE Research Network, in an interview on Thursday. 

Bathon emphasized the benefit for Morgan Stanley of having Calvert's capabilities, with sustainable investing products for clients a growing trend, one that has attracted a record amount of flows this year.

And he called the Eaton Vance-owned Parametric mutual fund family, comprised of custom-made separately managed accounts, a "prize" in this deal. 

The availability for customization and tailor-made products for clients over cookie-cutter options is a major industry trend, Gorman said on the call with analysts on Thursday. 

"Its products speak to the generational requirements of today's investor — responsible investing, data-driven, and customized solutions," Michael Spellacy, senior managing director for capital markets at Accenture, told Business Insider. 

Read more: Big investors like Apollo and Carlyle are clamoring for a piece of the $30 trillion ESG space. We spoke to 15 insiders about how they're ramping up hires, raising money, and striking data-driven deals.

But Eaton Vance couldn't "distribute it enough in a way that gets a profitability advantage," and Morgan Stanley has the built-in network, he said. Morgan Stanley, for its part, is already the largest distributor of Eaton Vance funds, Gorman told the Wall Street Journal. 

One East Coast-based Morgan Stanley financial advisor, who requested anonymity because he was not authorized to speak with a reporter, said he was most interested in the fixed-income capabilities Eaton Vance could bring to the firm, along with Parametric. 

As consolidation takes the industry by storm, insiders expect more to come

The deal, which the firms expect to close during the second quarter of 2021 and sent shares of Eaton Vance and other publicly traded asset managers higher on Thursday, is the latest sign of widespread consolidation in the money-management industry. 

Mid-sized asset managers have been pressured as fees for products and services in the space have plunged in recent years, driving a need for size to eke out profits.

Franklin Resources bought Legg Mason earlier this year, and the Wall Street Journal reported in late September that activist investor Trian Fund Management was building stakes in asset managers Invesco and Janus Henderson with an eye to consolidation in the industry. 

Read more: Franklin Resources and Legg Mason's $4.5 billion merger is the latest in a wave of asset manager M&A — here are 4 more potential takeover targets

"You can expect waves of consolidation in asset management because most of the product is the same. You can't carve differentiation unless you have world-class distribution," Accenture's Spellacy said. 

Over the summer, Gorman foreshadowed that a deal in the space would be coming during a virtual conference the bank hosted, according to a transcript on the investment research platform Sentieo. The firm wasn't done with acquisitions after E-Trade, he said. 

"Gorman's cementing his legacy," one Morgan Stanley wealth advisor said. 

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