Morgan Stanley's $13 billion E-Trade acquisition will help the bank reach new demographics

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The Wall Street giant has agreed to buy the online brokerage firm for $13 billion in an all-stock takeover, marking the biggest acquisition by a US bank since the financial crisis, as reported by The Wall Street Journal.

The transaction is expected to close in the fourth quarter of this year. Under the deal, E*Trade will keep its brand, as well as its branches and ad campaigns. Morgan Stanley expects $150 million in cost cuts from using E*Trade's low-cost deposits to replace some of its existing funding of loans.

E*Trade boasts 5 million retail customers and $360 billion in customer assets, and it also operates an online banking service. Meanwhile, Morgan Stanley has 15,500 human advisors who cater to millionaires, and $2.7 trillion in customer assets.

It also operates a robo-advisor platform, which compliments E*Trade's offering. The bank has been eyeing this acquisition for years: Morgan Stanley's now-CEO James Gorman had approached E*Trade in 2007, but no deal materialized at the time. And last year, it was rumored that Goldman Sachs was looking to acquire E*Trade - though we accurately predicted that a different player would scoop up the company in 2020.

The acquisition continues Morgan Stanley's shopping spree to reach less affluent customers. In February 2019, the bank acquired software company Solium Capital for $900 million, to secure the firm's young, salaried clients as future affluent customers of its Wealth Management arm.

Acquiring E*Trade seems to intensify this push to reach less affluent demographics: E*Trade's average account size stands at just under $70,000, suggesting that its users are still at the beginning of building their wealth, while Morgan Stanley's average lies at $900,000, per TechCrunch.

Through this deal, E*Trade can stave off competition from both startups and its larger peers.

Competition from startups has forced legacy online brokerage firms to cut their prices. New entrants - including commission-free trading platform Robinhood, which has over 10 million users - are shaking up the industry with digital-first services that aim to democratize investments with their low fees.

This has triggered a fee war within the industry, with Charles Schwab, TD Ameritrade, E*Trade, Fidelity, and Vanguard all eliminating commissions on online trades within a matter of months. For context, E*Trade used to make 18% of its revenue from stock trade commissions, per a Robinhood Snacks report seen by Business Insider Intelligence, suggesting that the change in pricing may be significantly hurting the company's revenue streams.

Now, the industry is bracing for a wave of consolidation as eliminated fees force incumbents to seek ways to cut costs to offset declining revenues. Charles Schwab agreed to buy TD Ameritrade for $26 billion in November 2019, likely as a result of the intense price war waged among brokerage fees.

Together, Schwab and TD Ameritrade have over $4 trillion in assets under management - making them the second-largest brokerage after Vanguard. Following this, we predicted that their smaller peer E*Trade would need to look for potential buyers to remain relevant. We expect consolidation in the industry to continue as a defense play against price competition and players that have already combined forces to capture larger shares of the market.

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