Morgan Stanley buying discount broker E-Trade for about $13 billion in stock

Morgan Stanley, the investment bank for millionaires, big business and megamergers, is buying E-Trade Financial, the online brokerage that encouraged waves of regular investors to get into the market with ads featuring a talking spokesbaby.

The roughly $13-billion, all-stock deal would be one of the biggest deals on Wall Street since the financial crisis more than a decade ago, and it would mark the latest chapter in Morgan Stanley’s transformation from a scrappy, deal-doing, stock-trading investment bank to a more well-rounded financial firm more reliant on its asset and wealth management businesses.

E-Trade will bring with it 5.2 million client accounts, $360 billion in retail client assets and a pool of customers who, as they presumably become wealthier, could use more of Morgan Stanley’s full-service offerings. Morgan Stanley has 3 million clients and $2.7 trillion in client assets.

The deal also gives E-Trade some shelter during a time of massive disruption in the retail brokerage industry. Its rivals Charles Schwab and TD Ameritrade are in the midst of their own merger, and the industry is still absorbing the latest blows from its price war.

Brokerages have made it free to trade U.S. stocks and exchange-traded funds online, slashing their commissions to zero in hopes of attracting and keeping customers.

Brokerages still make money from account fees and interest earned on customers’ cash, but the price war has pummeled revenues.

“Between zero trading commissions and competitive yielding savings accounts and cash management products, the competition for consumers’ cash and investments is as fierce as ever,” said Greg McBride, chief financial analyst for Bankrate.com. “And this reaches a broad spectrum of households, it isn’t just the ultra-wealthy that are in demand.”

Industry analysts believe the complementary parts of Morgan Stanley and E-Trade make them a good fit, and E-Trade’s stocks surged after the announcement Thursday, closing nearly 22% higher. But Morgan Stanley’s stock ended down more than 4%, reflecting investors’ concerns that it may be paying too high a price.

E-Trade shareholders will receive 1.0432 Morgan Stanley shares for each share they own. That values each E-Trade share at $58.74, based on Morgan Stanley’s stock price Wednesday. That’s 30.7% more than E-Trade shares’ closing price Wednesday.

E-Trade will become a division within Morgan Stanley and continue to be run by Chief Executive Mike Pizzi. The companies expect the deal to close in the fourth quarter of this year.

Under CEO James Gorman, Morgan Stanley has shifted into new, more universal financial services that can bring in steady revenue when the more traditional parts of its business — trading and advising clients — slow down or suffer in difficult markets.

The strategy has worked. Morgan Stanley’s income has been less volatile, and the bank has been consistently hitting or exceeding its profitability goals, including record profits last year.

“E-Trade represents an extraordinary growth opportunity for our wealth management business and a leap forward in our wealth management strategy,” Gorman said in a statement.

Besides the deposits the deal will bring, which Morgan Stanley can use to start making loans, E-Trade also has a popular online platform that helps businesses manage their employee stock plans that will be merged into Morgan Stanley’s existing platform. The stock plan administration business could be the most compelling piece of the tie-up.

Consolidation has been picking up across many parts of the financial industry. Just this week, asset manager Franklin Resources said it would buy rival Legg Mason for $4.5 billion.

Schwab’s deal with TD Ameritrade, which was announced in November, set off a wave of speculation that E-Trade would also find a partner to better compete.

E-Trade has been a pioneer in the online brokerage business, promising customers lower prices and easier trades by going through their computers or phones rather than full-service brokers. It’s perhaps most famous for a run of advertisements that began with the 2008 Super Bowl boasting that buying stock with the click of a mouse was so easy that even a talking baby could do it.