Why Morgan Stanley's $7B Eaton Vance Deal Surprised Analysts

Also recently, Trian Fund Management took a 9.9% stake in both Invesco and Janus Henderson with the hope of merging the two firms to better compete against giant asset managers like BlackRock.

Now, the industry can add another powerhouse to the list. With the addition of Eaton Vance, Morgan Stanley will oversee $4.4 trillion of client assets  across its wealth management and investment management segments.

(See: Here's the Firm Buying Stakes in Invesco and Janus Henderson)

During a conference call early Thursday, Morgan Stanley Chairman and CEO James Gorman explained that its latest deal helps diversify the firm's overall stability and strategy.

Morgan Stanley now has "three world-class businesses of scale," said Gorman:

• Institutional securities with 14% of market share as of 2019 and about $20 billion in net revenues;
• Wealth management with $3.3 trillion in client assets on a pro forma basis after the E-Trade acquisition and about $21 billion in pro forma net revenues; and 
• Investment management with $1.2 billion in assets under management on a pro forma basis after the Eaton Vance deal is completed, which should provide the firm with an additional $5 billion in pro forma net revenues.

CFRA Analyst Kenneth Leon concurs with Gorman's assessment. He wrote a note saying that Morgan Stanley's acquisition of Eaton Vance, which has $500 billion in assets under management, "advances Morgan Stanley's strategy to scale fee-based businesses to drive stable, recurring revenue.

"We see the deal expanding Morgan Stanley's best-in-class ranking in investment banking, as well as investment and wealth management …. AUM. We think the Morgan Stanley brand will strengthen the four disparate asset managers under Eaton Vance that include Parametric, Calvert, E/V/M, and Atlanta Capital," Leon said.

Leon views the Eaton Vance acquisition as "complementary with more scale across all investment classes, especially fixed income/municipal income funds, sustainability, and customized portfolio solutions."

In its upgrade of Morgan Stanley's long and short-term senior unsecured debt following completion of E-Trade acquisition, Moody's senior vice president Donald Robertson said the E-Trade purchase also was "another deliberative step in [the firm's] clear and consistent strategy to shift its business mix towards generating recurring, profitable revenue-streams in wealth and investment management."

He continued: These revenue-streams are generally more stable and of lower risk than the activities and exposures in MS's institutional securities' business segment."

(Related: Morgan Stanley to Complete E-Trade Purchase Oct. 2)