Why Morgan Stanley Bet Big on Eaton Vance

Why Morgan Stanley Bet Big on Eaton Vance


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Morgan Stanley announced yesterday that it plans to buy Eaton Vance, the investment and wealth management firm, in a $7 billion deal. Coupled with the firm’s $13 billion purchase of E-Trade earlier this year, it shows the Wall Street stalwart’s move to less flashy — but steadier — fee-based businesses, a sign of the times for the financial industry as a whole.

The back story: Eaton Vance approached Morgan Stanley about a sale several months ago, but Morgan Stanley couldn’t strike a deal before its E-Trade takeover closed, a source told DealBook. (That acquisition closed last week.) The deal wasn’t sealed until early yesterday morning: “I think the merger agreement was signed at 3 or 4 a.m.,” Eaton Vance’s chief, Tom Faust, told analysts a few hours later.

The strategy: When Morgan Stanley and Goldman Sachs converted into bank holding companies during the 2008 financial crisis, it subjected them to stricter regulation and higher capital requirements. That made risky but moneymaking businesses like sales and trading less profitable. Both firms have since diversified away from investment banking.

• Goldman Sachs has pushed into consumer banking, via online lender Marcus and co-branded credit cards with Apple and G.M.

• Morgan Stanley has bet instead on wealth and investment management, starting with Smith Barney and continuing with E-Trade and Eaton Vance. It’s a business that James Gorman, Morgan Stanley’s C.E.O., is familiar with from his time running Merrill Lynch’s famed brokerage business. “I’ve thought a lot about and observed a lot of asset management deals through my career,” Mr. Gorman told analysts yesterday. “Sometimes they work great, sometimes they don’t. And the bigger it is, the higher the bar.”

The numbers: With Eaton Vance, Morgan Stanley’s investment management division would oversee roughly $1.2 trillion in assets and generate more than $5 billion in sales. It and its bigger wealth management business already account for just over half of Morgan Stanley’s revenue. Bulking up these businesses even more, Mr. Gorman hopes, will persuade analysts to view his firm less like an investment bank and more like Charles Schwab, which despite its staid reputation trades at about 20 times earnings, double the multiples of Morgan Stanley and Goldman.

• If Morgan Stanley’s multiple rises halfway to Schwab’s, Mr. Gorman said, the bank’s stock should be worth twice its value today. The C.E.O. acknowledged that such a rerating is a challenge: “I hope it happens in my career, let alone in my lifetime.”

What happens next: Steady, predictable fees are attractive, but asset managers that charge a premium for actively managed funds are under pressure as investors embrace low-cost, passive funds. That makes scale the key to profits, so expect more consolidation within the money-management industry. For example, Franklin Resources agreed to buy Legg Mason for $4.5 billion this summer. And the activist investment firm Trian recently bought stakes in both Invesco and Janus Henderson, aiming to push them to merge.


Today’s DealBook Briefing was written by Andrew Ross Sorkin and Lauren Hirsch in New York, Ephrat Livni in Washington, and Michael J. de la Merced and Jason Karaian in London.


Stimulus talks continue, but prospects for a deal remain uncertain. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin spoke yesterday about a potential compromise on additional federal aid. But what happens next is unclear: Mr. Mnuchin said the administration was open to a broad stimulus package, according to Ms. Pelosi’s spokesman, only for a White House spokeswoman to say President Trump is primarily interested in a “skinny” aid bill that targets specific groups. Senator Mitch McConnell, the majority leader, spoke for many when he said, “The discussion from day to day can be confusing for all of us to follow.”

Coinbase employees have quit over the company’s stand against social stances. The cryptocurrency exchange said that 60 people, or about 5 percent of its staff, accepted severance packages offered for employees unhappy with its C.E.O.’s decision to ban political activism at the workplace. More people are in talks to leave.

AT&T reportedly plans a huge wave of job cuts at WarnerMedia. Thousands of employees across WarnerMedia divisions, from Warner Bros. to HBO to TNT, may be laid off as the media giant aims to cut costs by as much as 20 percent, The Wall Street Journal reports. It follows Disney’s plans for layoffs, as the entertainment industry reels from the pandemic.

Princeton will name a new dorm after a top Black woman executive. The university will tear down a residential complex named after President Woodrow Wilson and replace it with a new building named after Mellody Hobson, the co-C.E.O. of Ariel Investments and an alumna who donated to the new construction.

A top fund-raiser for President Trump faces a criminal charge. The financier Elliott Broidy was charged by federal prosecutors with conspiring to violate the Foreign Agents Registration Act by using his political connections to aid Chinese and Malaysian interests. The charge is related to his efforts to end a U.S. investigation into the 1MDB scandal.

Some corporate leaders have scored big paper gains from fortuitous stock and options grants this year, according to The Times’s calculations. The surge “highlights how the compensation of senior executives is designed to give them enormous windfalls, which they have gotten even during one of the sharpest economic downturns in decades,” Peter Eavis writes.

The executives whose 2020 options and grants have appreciated the most:

William Lynch, Peloton’s president, with $64 million in gains

Ed Stack, the C.E.O. of Dick’s Sporting Goods, with $60 million

Fred Smith, the FedEx founder, with $37 million

Stepháne Bancel, the Moderna C.E.O., with $30 million

Marc Benioff, the Salesforce chief, with $27 million

Some of the academic research that caught our eye this week, summarized in one sentence:

• During the pandemic, job seekers have shifted their searches away from start-ups and toward larger, older companies. (Shai Bernstein, Richard R. Townsend and Ting Xu)

• The secret to bailing out banks during a crisis is … keeping those bailouts secret. (Gary Gorton and Guillermo Ordoñez)

• Denmark shows that long periods of negative interest rates aren’t so bad after all. (Signe Krogstrup, Andreas Kuchler and Morten Spange)

Jennifer Taub is a banking law expert at Western New England University whose research focuses on “follow the money” matters. Her new book, “Big Dirty Money: The Shocking Injustice and Unseen Cost of White Collar Crime,” addresses the impact of corporate criminality on society. (Read The Times’s review, which says that it “explicitly and persuasively places the breakdown of enforcement and accountability in the context of money and class.”)

Ms. Taub spoke with DealBook about what makes white-collar wrongdoing different from other types of crime.

How did the notion of “white-collar crime” develop?

Indiana University academic Edwin Sutherland introduced the term in 1939, later refining it in his groundbreaking 1950 book, “White Collar Crime,” which focused on offenses committed by “a person of respectability and high social status in the course of his occupation.” The emphasis was originally on the offender’s social position but has since morphed to focus on the type of crime, now including offenses like tax evasion, investment fraud, bribery of public officials and money laundering.

White-collar crime isn’t punished like offenses characterized as violent. Why?

Great question. There is still a misconception that white-collar crime is either victimless or not violent. And yet we can see hundreds of thousands of victims over the years. We think of “violence” as the direct use of physical force against another person causing injury or even death. When it comes to certain white-collar crimes, instead of force, fraud is used and the result is often the same.

Take the millions who lost their homes to foreclosure after the toxic mortgage-backed meltdown and related financial crisis of 2008. No one brandished a gun and chased them out of their houses, but didn’t fraud and deception have that effect?

Why is it more difficult to prosecute white-collar offenses?

This is a fascinating, complex and sometimes frustrating topic. Intent is an element of most offenses, and jurors are often told to draw inferences from the circumstantial evidence to figure out what the accused knew. That’s much more complicated when dealing with complex financial matters than street crimes.

If the prosecutor shows a video of someone sprinting out of a store clutching a flat-screen television and security guards chasing behind, it’s not so hard to infer intent. But it’s harder to understand enough about accounting fraud or misleading investors for jurors to be comfortable determining that an executive knew the books were cooked.

What’s the lesson for DealBook readers — besides that “people can often get away with it”?

I fear that if I answer this question directly, I would be encouraging more lawbreaking and predation. My book makes clear that the system is broken and there will hopefully be a crackdown soon.

Readers may recall that this implicit immunity for the upper class was not always the norm. After the Enron and related accounting scandals, high-ranking executives were prosecuted, convicted and sent to prison, unlike today. For the majority of business leaders who are honest and want to do the right thing, I would encourage them to step up compliance despite the low level of enforcement today. Corporate impunity erodes public trust in the important business institutions that we need to enjoy life, thrive and survive.


• The chip maker AMD is reportedly in advanced talks to buy a rival, Xilinx, for more than $30 billion. (WSJ)

• Shares in IBM rose 6 percent after the company announced plans to spin off its legacy tech services business to focus on cloud computing and A.I. (NYT)

• A group including the rapper and political activist Killer Mike is creating a digital bank focused on Black and Latino communities. He discusses it in the latest episode of Kara Swisher’s “Sway” podcast. (TechCrunch, Times Opinion)

Politics and policy

• The U.S. federal budget deficit topped $3 trillion in the 2020 fiscal year, a record driven by federal pandemic aid measures. (NYT)

• Facebook banned a marketing firm that participated in a campaign involving deceptive political content on behalf of Turning Point Action, a conservative advocacy group. (Politico)

• Federal and state prosecutors charged 13 men with a plot to kidnap Gov. Gretchen Whitmer of Michigan, who has become a target of anti-lockdown protests. (NYT)


• Microsoft said it would give developers more leeway over pricing in its app store, seeking to draw a contrast with Apple’s tightfisted control of the iOS App Store. (NYT)

• The Justice Department appealed a judge’s injunction preventing the Trump administration from banning TikTok on U.S. app stores. (NYT)

Best of the rest

• Behind the $1 billion property spending spree of Citadel’s Ken Griffin. (WSJ)

• “Black LinkedIn Is Thriving. Does LinkedIn Have a Problem With That?” (NYT)

• Remembering our colleague Jim Dwyer, one of the top chroniclers of New York City. (NYT)

We’d love your feedback. Please email thoughts and suggestions to [email protected].


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