Morgan Stanley is buying E-Trade for $13 billion

Morgan Stanley is buying online broker E-Trade for $13 billion in an all-stock deal, a move that shows how serious the Wall Street giant is about catering to everyday consumers.

Shares of E-Trade rose 24% in early trading on the news while Morgan Stanley fell more than 4%. The deal comes nearly three months after E-Trade rivals Charles Schwab and TD Ameritrade announced a $26 billion merger.

Discount brokers had to adapt their business models after just about every company in the industry eliminated commissions on online trades last year. That killed off what was once a lucrative revenue stream.

Trading has become a commodity business because of popular trading apps like Robinhood, which recently raised money in a funding round that valued the company at $7.6 billion.

Competition for customers is fierce and firms are launching new services to try and differentiate themselves. Mutual fund giant Fidelity, for example, recently unveiled a service that lets investors buy small chunks of high-priced stocks instead of entire shares. Robinhood already offers so-called fractional trading as well.

As a result, Wall Street speculated E-Trade could be a takeover target for either Morgan Stanley or Goldman Sachs. Shares of another E-Trade rival, Interactive Brokers Group, rose 3%.

E-Trade reported a nearly 30% drop in earnings per share from a year ago for the fourth quarter last month. That was worse than what analysts were expecting. Overall revenue was down 8% and commissions revenue plunged 54%.

But a combined Morgan Stanley and E-Trade will instantly become one of the leading financial firms on both Wall Street and Main Street.

E-Trade’s more than 5.2 million mainstream investing clients and over $360 billion in assets will boost Morgan Stanley’s wealth management unit, which tends to cater to more affluent customers. It currently has 3 million clients and $2.7 trillion in assets.

“E-Trade represents an extraordinary growth opportunity for our Wealth Management business and a leap forward in our Wealth Management strategy,” said Morgan Stanley chairman and CEO James Gorman in a statement.

Gorman added on a conference call with analysts that the deal adds an “iconic brand” to Morgan Stanley that will instantly boost its digital business as well.

The companies said in the press release that once the deal is done, Morgan Stanley will generate about 57% of its pre-tax profits from its wealth and investment management unit, up from about 26% ten years ago.

E-Trade CEO Mike Pizzi will remain with the company and run the business for Morgan Stanley. Gorman said there will be “no disruption” for current E-Trade clients.

Pizzi and Gorman both talked about how the addition of E-Trade will also allow Morgan Stanley to offer more traditional banking services, such as checking and savings accounts, to E-Trade’s younger consumer base.

E-Trade has about $56 billion in deposits, which will help provide funding for Morgan Stanley.

The companies also touted E-Trade’s corporate services division, which helps to set up stock plans for big public companies. That business accounted for about a quarter of the company’s overall accounts, which should help soften the blow from the lost commission revenue.

Gorman referred to this division as “a killer business” on the conference call.

Morgan Stanley and E-Trade also said they were hopeful the merger would be approved by regulators and shareholders by the fourth quarter of the year. Morgan Stanley said that it anticipates $400 million in potential cost savings, but the company did not mention whether any job cuts would take place.