Morgan Stanley Gets Just What It Wanted in Eaton Vance

(Bloomberg Opinion) -- Morgan Stanley might have officially announced on Thursday that it was acquiring Eaton Vance Corp. for about $7 billion, but for those who have been listening to Chief Executive Officer James Gorman, it was never truly a matter of whether the white-shoe Wall Street bank would make such a move but rather when and with whom.

In Eaton Vance, Gorman seems to have gotten just what he wanted. But don’t take it from me, take it from the CEO himself. This is what he said during a virtual conference in June, when asked about where he saw Morgan Stanley’s asset-management business headed in the years ahead:

“Our asset management business’s strength was its breadth. Its weakness was its lack of depth. So we’re in every vertical. We have liquidity management. We have a fixed income. We have an active equities business. We’re deep in value. We’ve also got great growth businesses. We’ve got a fund of funds business. We have infrastructure. We’ve got real estate. We’ve got private equity. We’ve got MIS. But everything was kind of like small. And finally, we’re starting to get some scale.

…

Now are where we want to be? No. We can be bigger — definitely bigger in scale in fixed income. We could definitely have more and different style managers across our active equities business. We can definitely be bigger in PE. There are lots of areas where we can grow.

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We’ll do deals. I've been very clear about that. I mean I’m not shy about doing deals that I think hit our sweet spot and there are a lot of things that hit our sweet spot. But you can get caught doing large-scale asset management deals, you want to be very cautious about that. It doesn’t mean that's a zero chance.

But certainly my bar and the Board’s bar on that is much higher, but there are — it’s a consolidating industry. Of all the sectors in financial services, from payments to corporate lending to — you go across the whole universe that you cover, probably the most distributed, the least consolidated is the asset management space still.”

Eaton Vance, a Boston-based firm with more than $500 billion in assets under management, seems to check all the boxes. For one, it’s the right size for a splashy acquisition. With this move, Morgan Stanley Investment Management will manage about $1.2 trillion of assets, finally reaching Gorman’s goal for $1 trillion. Recall that earlier this year, just before the coronavirus pandemic reached the U.S., Franklin Resources Inc., with about $700 billion in assets, announced it would buy Legg Mason Inc. and absorb its $800 billion in assets. Around this time two years ago, Invesco Ltd. announced a plan to acquire OppenheimerFunds, which managed more than $246 billion in assets at the time.

The asset mix also fits with Gorman’s vision. He said Morgan Stanley “could definitely have more and different style managers across our active equities business.” Well, as of July 31, Eaton Vance had $133 billion of assets in equities, or 26% of its total AUM. He said the bank could definitely be bigger in scale in fixed income. Eaton Vance has about $69 billion in fixed-income strategies and almost $30 billion in those for floating-rate income. He’s talked about expanding into other assets. More than half of Eaton Vance’s assets are in “Parametric overlay services” and “Parametric custom portfolios,” which focus on mandates like absolute return, commodities and currencies.

It’s more cosmetic and less consequential, but Eaton Vance also exudes the kind of white-shoe culture that has long defined Morgan Stanley. Before the pandemic, when Eaton Vance’s fund managers visited New York for an annual luncheon with financial journalists, the event took place at The Modern, a restaurant with two Michelin stars that’s attached to the Museum of Modern Art. In that sense, at least, it’s different from Morgan Stanley’s acquisition of discount brokerage E*Trade Financial Corp. for $13 billion, which was announced in February and closed just last week.

Gorman called Eaton Vance “a perfect fit for Morgan Stanley” in a statement Thursday, noting that the bank will now oversee $4.4 trillion across its wealth management and investment management segments. He told Bloomberg News’s Sridhar Natarajan in an interview that “asset management has been an unsung hero inside Camp Morgan Stanley.” This is all part of a plan, shared by Goldman Sachs Group Inc., to diversify the business away from high-stakes trading revenue and create more recurring income over the long run. In the nine months through July 31, Eaton Vance brought in $1.12 billion in total management fee revenue, up slightly from $1.09 billion in the period a year earlier.

As Gorman said, the asset-management industry is consolidating. It has to, given the market is increasingly dominated by free-to-trade exchange-traded funds and low-fee passive funds popularized by Vanguard Group Inc. There’s every reason to expect more deals like this in the years to come, whether from big U.S. banks that are being squeezed by rock-bottom interest rates or large money managers looking to solidify their position.

It probably won’t come from Morgan Stanley, though, with Gorman cautioning not to expect another big acquisition in the near future. “We’ve just done two significant transactions. We need to absorb these businesses for the next several years,” he told Bloomberg News.

It makes sense for the bank to take a breather. Gorman has E*Trade in the fold, with Eaton Vance expected to follow in the second quarter of 2021. Morgan Stanley’s shareholders seem to approve, given its stock climbed on Thursday, extending its outperformance relative to other large Wall Street firms this year (Eaton Vance’s shares were up almost 50%). All told, it’s quite the impressive setup for the long term during an otherwise volatile year.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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