There is a Blackstone and there is BlackRock. Does there need to be anything in between? Mid-tier managers like Eaton Vance have been caught in the middle between goliaths like BlackRock, which has ridden the indexing wave to manage $7tn, and private capital specialists like Blackstone, with around $600bn. The former’s scale can absorb low passive management fees, while the latter earns sky high fees for specialised private market strategies.
Into this gap has stepped Morgan Stanley. On Thursday the bank announced it would acquire $500bn money manager Eaton Vance for $7bn. That is a pretty price, a 40 per cent premium to the target’s previous closing price, to create a $1.2tn asset manager.
By folding Eaton Vance into its asset management division Morgan Stanley should cut 4 per cent of that division’s costs, promising that Eaton’s funds will fit nicely with its own massive wealth manager. Just last week Nelson Peltz took large stakes in Invesco and Janus Henderson hoping to prod them into the consolidation to which Eaton Vance has profitably submitted.
Chief Executive James Gorman has sought to stabilise Morgan Stanley. Prior to the last financial crisis its profitability fluctuated with fixed income and investment banking cycles. Firstly he bought out its Smith Barney joint venture from Citigroup. This year it acquired ETrade brokerage for $13bn. Today, Morgan Stanley can claim that nearly three-fifths of its revenue comes from fee-based businesses. That has more than doubled since 2010.
Morgan Stanley remains a bank however and its shareholders are laser-focused on how it allocates capital. Mr Gorman says it is spending about a percentage point of excess capital. Cost savings from the deal will “modestly” add to earnings.
Bank investors might prefer the firm’s capital returned in the form of dividends and buybacks. Perhaps, but capital return has been constrained by its regulators during the pandemic. Mr Gorman decided instead that the bank’s extra capital should go to the shareholders of Eaton Vance.
As Morgan Stanley shares rose around one per cent on the day, his calculation appears vindicated.
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