Discussion

I need a response to my classmate below:

Merger or acquisition that did not go as planned

The article discusses Morgan Stanley (MS) acquiring E*TRADE in 2020. Investors did not want this deal to go through; instead, they hoped for MS to return significant cash to them in dividends and buybacks. To make matters worse, because of MS’s premium, the company expects the acquisition to be dilutive to earnings in 2021, break-even in 2022, and accretive in 2023 (1). It is estimated that the companies are assuming close to $400m of annual cost synergies to be reached over three years and no net revenue gains from the transaction (1); therefore, many of the investors were not thrilled about this venture. The article even described the acquisition as value-destroying.

It points out that MS still lags in client assets even with the acquisition. MS is considered a traditional Wall Street bank that serves institutional clients. Their sales and trading business lines in Institutional Securities have not just been struggling with decline but are also very capital intensive (1). This is notably worrisome for MS, as it lacks the massive deposits of other big banks such as Bank of America (1). So, the E*TRADE did not bring any value to help here.

Another point the article mentions is that MS has limited experience in serving clients through digital platforms. Even though E*TRADE is highly known for its digital platform, investors are afraid that it will not garner any meaningful growth for MS. MS will need to work really hard to break away from its traditional background (1). MS acquired E*TRADE to target millennials; however, this demographic is flocking towards other sites such as Robinhood (2). So, again there is no value here either.

 “Sins” committed

The acquisition of E*TRADE by MS falls into the #2 sin of not recognizing that the cultural fit of two companies is as important as a strategic fit. Mr. Welchs article talks about companies considering the cultural fit because if they do not, the integration process will be cumbersome, which produces situations where the acquisition does not work (2), which is what is happening with the MS and E*TRADE acquisition. I do not believe the companies looked with an appreciative perspective at what was helpful, good, constructive, and strong about each companys culture (2). I think if they had, the investors would have supported the acquisition more. The companies are at opposite ends of the spectrum, causing pain points to materialize. Again, one is a traditional company, the other as a modern e-business, shaping up to result in a disastrous outcome because of the mix-match culture.

 

Morgan Stanleys Middle-Class Bet. 2020. https://www.wsj.com/articles/morgan-stanleys-middle-class-bet-11582328939

Jack Welch. 2016. The Six Deadly Sins of Mergers & Acquisitions.  https://jackwelch.strayer.edu/winning/mergers-and-acquistions-six-deadly-sins/