Morgan Stanley's CEO explains why the bank's $7 billion bid for Eaton Vance makes sense even with such a high price tag: 'I'm not ashamed to say it's fully priced'

  • Morgan Stanley chief executive James Gorman told analysts on Thursday's earnings call that his bank paid a steep price in its bid to acquire investment manager Eaton Vance for $7 billion in cash and stock.
  • Nevertheless, he maintained that the deal will bear fruit for the New York-based bank.
  • The announcement of the Eaton Vance deal came just six days after closing its all-stock E-Trade acquisition, which was valued at $13 billion when the deal was announced in February.
  • Gorman seemed to throw cold water on the notion that Morgan Stanley might be entering into an M&A shopping spree.
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Morgan Stanley chief executive James Gorman defended the bank's recently announced bid for asset manager Eaton Vance despite the high price tag of the deal. 

Earlier this month, the New York-based bank announced its plans to acquire the Boston-based investment manager for $7 billion in cash and stock.

"I'm not ashamed to say it's fully priced, but this is a quality asset," Gorman told analysts on the bank's 2020 third-quarter earnings call. "We will get the expenses out of this. We will consolidate this. We will generate revenues from it."

"I'm positive that this deal is going to deliver," he added.

Read more: Why Morgan Stanley's $7 billion bid for a storied asset manager gives it a leg up on rivals and signals more deals to come

The announcement of the Eaton Vance deal came just six days after closing its all-stock E-Trade acquisition, which was valued at $13 billion when it was announced in February. The closure of the E-Trade deal and announcement of the Eaton Vance acquisition in such quick succession had some industry watchers wondering if Morgan Stanley might be on the precipice of a buying frenzy.

But Gorman seemed to cast cold water on that theory on the call, and laid out reasons why the Eaton Vance deal — which would beef up Morgan Stanley's asset management division to $1.2 trillion in assets — makes sense.

"It certainly came hot on the tail of E-Trade," Gorman said. "We didn't want to communicate, all of a sudden, we're trying to do an acquisition week. We're not. We didn't control the timing."

He explained that he is optimistic that Eaton Vance will bolster Morgan Stanley's fixed income asset management business "in a way that we couldn't have done otherwise, and it provides us some real growth endurance."

Gorman also expects to see fund sales go up through the acquisition. 

"We have trouble getting our product distributed domestically because we don't have a strong wholesaling sales force as others do. They do. They have a world-class one," he said.

Representatives for Morgan Stanley did not immediately respond to a request for comment from Business Insider.

Despite its recent purchases, Gorman signaled that Morgan Stanley is not on an M&A buying spree

On the earnings call, Mike Mayo, an analyst with Wells Fargo, pressed Gorman on the bank's long-term M&A strategy, suggesting that Morgan Stanley had altered course in recent years, "reversing some of the actions that you took," Mayo said.

He referred to deals like Morgan Stanley's sell-off of Van Kampen Investments for $1.5 billion a decade ago. 

"We've not had a long-term reversal," Gorman said. "This is not a change in strategy at all. This is about getting scale in the businesses we want to be in."

Gorman pointed to other instances in which the bank has sold off some of its assets, including its 2011 split from hedge fund FrontPoint; the 2012 sale of resident mortgage loan provider Saxon Mortgage Services; and its 2014 sale of oil pipeline company Transmontaigne. 

Those deals demonstrate the bank has maintained a steady trajectory in streamlining other business lines in recent years, Gorman said.

As a result, Morgan Stanley shouldn't be seen as going on an M&A shopping spree in light of its two recent purchases.

"We have fundamentally … changed the profile of this company to focus on originating, distributing and managing capital for individuals, governments, and institutions," Gorman said. "That's what we do, and this is entirely consistent with that."

Morgan Stanley's Gorman believes the Eaton Vance deal will generate long-term value prospects

In expressing bullishness for the long-term prospects of the Eaton Vance acquisition, Gorman refuted the notion that the deal wouldn't yield returns meaningful enough to warrant its cost.

In shoring up his argument, Gorman made a reference to the high costs of past deals Morgan Stanley has made, like the $900 million purchase of software company Solium last year, or its $2.7 billion purchase of Citigroup's wealth division in 2008, which went on to become Morgan Stanley Smith Barney. (The group was renamed to Morgan Stanley Wealth Management in 2012.)

"If we overpaid by a couple of hundred million dollars [on the Eaton Vance purchase], people said we overpaid Solium by a couple of hundred million dollars. Some people said we overpaid Smith Barney by a couple of hundred million dollars," he said.

"I take a very long-term view on acquisitions," he added.

Other Wall Street giants are looking to ramp up deals

Meanwhile, M&A activity has begun to regain some of the rhythm it lost earlier this year as the coronavirus pandemic ground much M&A activity to a halt.

Earlier this week, the chief executives of BlackRock and JPMorgan Chase — the largest asset manager and the largest US bank by assets, respectively — indicated that they were interested in ramping up acquisition activity on their firms' individual quarterly earnings calls.

Read more: JPMorgan and BlackRock say they're interested in money-management deals, but they're eyeing very different targets

"We would be very interested, and we do think you'll see consolidation of the business," said JPMorgan chief Jamie Dimon on the bank's earnings call Tuesday.

And Gary Shedlin, BlackRock's CFO, suggested on his firm's earnings call that the rest of the industry is trying to catch up to the portfolio the $7.3 trillion fund manager has already built.

Now, BlackRock is more interested in pushing ahead into new M&A territory, he said on the call, considering deals that "will broaden our technology capabilities, expand our global distribution reach and potentially scale certain parts of our private markets franchise."

BlackRock is "much less focused on the pursuit of traditional investment management consolidation," Shedlin added.

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