The planned $13 billion merger of E-Trade into Morgan Stanley heads to a close after earning the discount brokerage firm’s shareholder approval. The US-listed firm said more than 99 percent of votes cast Friday by its shareholders were in favour of the transaction, well above the required two-thirds threshold.
E-Trade anticipates that the merger will be completed during the fourth quarter of 2020, subject to the satisfaction of the remaining customary conditions to closing, including among other things, receipt of required regulatory approvals.
The American lender announced in February plans to move further from its core origins with an agreement to buy the discount brokerage firm E-Trade for about $13 billion, joining the battle for middle America’s wealth management market.
The addition of E-Trade would allow Morgan Stanley to tap into a new source of revenue through an additional 5.2 million customer accounts and $360 billion in assets. The takeover would also gives Morgan Stanley a significant share of the market for online trading and puts it on firmer footing with competitors like Bank of America and Wells Fargo.
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E-Trade investor sues to halt the deal
Earlier in May, E*TRADE’s directors were hit with a lawsuit in a New York court for keeping its proposed all-stock merger with Morgan Stanley on track.
The allegations centered around financial projections issued by E*TRADE management which, according the complaint, omits critical expectations for both firms, including revenue, dividends, tangible book value and earnings per share.
Specifically, E*TRADE operators have revised down their projections for the company’s earnings based on financial results through December 31, 2019. However, the proposed proxy to recommend the merger did not include an upward adjustment to these weak projections which the plaintiff says it makes sense following strong results the company achieved in the Q1 2020. Furthermore, the positive revision was justified even before that as E*TRADE exceeded earnings expectations in both Q3 2019 and Q4 2019.
In practice, this has caused the actual value of merger deal to be drastically reduced and even provides a negative premium for stockholders. It also makes the whole situation differs from the initial offer when Morgan Stanley proposed a cheaply valued stock that trades around 10 times projected 2020 earnings per share, while paying 15 times projected earnings for E*Trade. According to the deal terms, Morgan Stanley will issue 1.0432 of its shares for each E*Trade share.