Morgan Stanley [NYSE: MS] – Market Cap as of 24/02/2019 $71.89bn
Solium Capital Inc. [TSE: SUM] – Market Cap as of 24/02/2019 $1.08bn
Introduction
On February 11th, Morgan Stanley announced it had struck a definitive agreement to acquire the workplace wealth solutions’ company Solium Capital for $900m. The deal comes just a couple of days after the $66bn merger of BB&T with SunTrust, the biggest bank M&A deal since the 2008 crisis, hinting a possible comeback of the banking sector deals. The acquisition has followed a successful partnership between the two companies from 2016 consisting of Solium Capital administrating the equity compensation plans for Morgan Stanley’s corporate clients and their employees. With this acquisition, Morgan Stanley strengthens and complements its leading wealth management business by benefiting from Solium’s strong business-to-business salesforce and prominent private company equity administration. Morgan Stanley agreed to acquire the entirety of Solium’s common shares for CAD 19.15 per share in cash, thus paying a 43% premium and totalling to an equity value of around CAD 1.1bn or $900m. Due to its modest size, the transaction is expected to have an insignificant effect on the firm’s earnings and capital ratios. Furthermore, the deal is expected to be authorized during the second quarter of 2019, subject to Solium’s shareholders and regulatory approval.
About Morgan Stanley Group Inc.
Morgan Stanley is an American leading global financial services firm providing investment banking, securities, investment management and wealth management services. Morgan Stanley was founded in 1935 by J.P. Morgan partners in response to the Glass-Steagall act that enforced the separation of commercial and investment banking businesses. Nowadays, Morgan Stanley is the third biggest wealth manager in the world based on assets under management. With the acquisition of Solium, Morgan Stanley continues the industry trend of acquiring FinTechs that can help banks to stay ahead of the technological curve and develop relationships with a younger demographic. Morgan Stanley will manage the 1m employee-clients of Solium to add to its existing stock management business, which comprises 320 stock plan clients with 1.5m participants Last year, Morgan Stanley achieved record Net Revenues of $40.bn and EPS of $4.73 and thus outperformed its 2017 strong Net Revenues of $37.9bn and EPS of $3.09. However, Last earning season, Morgan Staley presented disappointing results as it missed profit forecasts whereas its competitors stated strong earnings reports. Indeed, lacking a consumer banking arm that could alleviate one of the worst Decembers for Wall Street since 1930’s, Morgan Staley suffered the entire weight of an utterly bearish market. As it can clearly be noticed by the chart below, the Institutional Securities and Wealth Management departments suffered a considerable setback during last year’s 4th quarter losing up to $952m in Net Revenues and $614m in Pre-Tax Income compared to 2017’s 4th quarter.
Industry Overview
The banking sector has been shifting towards consolidation since 2017 with the number and volume of deals rising throughout the last few years. 2019 has been marked by the biggest bank deal since the financial crisis of 2008, with BB&T Corp. purchasing SunTrust Bank Inc. in a $66bnall-stock deal. With the decade-long drought in banking M&A activity seemingly coming to a close, many large banking groups are focusing on technology as a recurring trend in their acquisition strategies. In the US, 20% of the top 50 banks have acquired a FinTech in the last few years. FinTechs have been seeing strong growth in the last five years and have become a frequent target of acquisition by banks and financial institutions, with major players such as Goldman Sachs and Société Générale involved. Although the targeted FinTechs have thus far been mainly of North American and European origin, similar trends are also starting to emerge in Asia and other regions. In the last few years, acquiring firms have focused on Wealth Management orientated FinTechs, with nearly 40% of the deals struck being made in this segment of the market.
The acquisition of Solium Capital by Morgan Stanley follows this familiar trend. This FinTech acquisition trend within the banking sector kickstarted in 2013, when the largest US banks acquired about 18 FinTech startups up to 2017, and hastened starting from 2017. The charge is being led by the likes of Goldman Sachs, BNP Paribas and JPMorgan. Much of these acquisitions are targeted towards FinTechs within Wealth Management, as is the case with Morgan Stanley’s acquisition. Wealth Management, however, is an evolving medium with shifts in demographics, expectation and regulations already observable.
According to a 2016 Accenture report, the Millennial generation will account for almost three quarters of all income generated by 2025. Moreover, over the next 30 to 40 year, we will observe a large transfer of wealth, resulting in a shift of wealth from traditional clients to the Millennial generation. The digitalization of such practices is another factor firms will need to tackle, one which helps to explain the rising trend of FinTech acquisitions within the banking sectors. Firms can capitalize on a Millennial workforce and client base which in North America is expected to hold $20 trillion of global assets by 2030, according to a CB Insights survey.
Deal Structure
On February 11, 2019 Morgan Stanley entered into a definitive agreement with Solium Capital Inc. to acquire the totality of Solium’s issued and outstanding common shares for C$19.15 ($14.42) per share in an all cash deal worth approximately C$1.1M ($900M). This is contrasting to Friday’s closing of C$13.36 per Solium share, effectively resulting in a 43 percent premium agreed by Morgan Stanley. The relatively high price is explained by the combined worth of Solium with the bank’s existing Wealth Management arm, a strategic move not hindering Morgan Stanley’s ability to return capital to shareholders.
Deal Rationale
The deal constitutes the first acquisition from Morgan Stanley since the financial crisis and is expected to pave the way for a series of future transactions of the kind, as said by the firm’s Chairman and CEO James Gorman. As a matter of fact, the two companies had already entered into a partnership back in 2016, with the aim of administering equity compensation plans for Morgan Stanley’s corporate clients and their employees. The recent acquisition at issue can therefore be considered as a further step in the same direction and is now backed by three main objectives.
First, Morgan Stanley plans to leverage the two parties’ strengths, thus becoming the industry leader in Workplace Wealth Solutions. According to the plans of Andy Saperstein (Morgan Stanley’s co-head of Wealth Management division), this acquisition will create an integrated Morgan Stanley Wealth Portal offering employers the opportunity to deliver tailored financial counseling and industry-leading advice to their employees. Indeed, as already discussed above in the article, Solium is a leading global provider of Software-as-a-Service for equity administration, financial reporting and compliance, with a strong B2B salesforce and an industry-leading cloud-based service platform. On the other hand, Morgan Stanleywill leverage its Wealth Management division, which constitutes its core business at around $463bn AUM (as of December 31st, 2018). The combination will count on both Solium’s 3000 stock plan clients (including Instacart, Levi Strauss, Shopify, and Stripe) and Morgan Stanley’s 320 customers (including Microsoft and Ford Motors, alongside other clients ranked in Fortune 500). As a matter of fact, despite being Morgan Stanley’s core business area, the Wealth Management division disclosed revenues of $4.1bn in Q4 2018, against $4.4bn for the same period of the previous fiscal year. Solium, instead, has been posting 15 years of revenues growth. Therefore, Solium would potentially represent a stabilizer for the buyer’s profitability in the years to come.
The second main driver of this $900m deal is to be found in Morgan Stanley’s desire to remain competitive with Fintech acquisitions, a strategy which other investment banks and financial service providers have been following lately. Goldman Sachs, for instance, made its move by acquiring “Final” (January 2018) and “Clarity Money” (April 2018), whileJ.P. Morgan had already integrated WePay (December 2017).
Closing this section, the third root cause of the deal at issue is somehow less intuitive andconcerns Morgan Stanley’s long-term growth strategy. Specifically, the firm has targeted Solium’s customers and their employees, mainly belonging to the categories of fast-growing private companies and startups. These employees are usually getting paid in stocks, hoping the company to which they belong will sooner or later go public, thus making those securities appreciate and generate returns. By combining with Solium, Morgan Stanley is potentially building long-lasting relationships with this new broader customer base, characterized by a younger demography with significant growth potential. In few words, these new customers might be the future generation of billionaires, and Morgan Stanley hopes to retain them in its Wealth Management division’s customer base. The company is already planning to serve them with its robo-advisory techniques (developed in 2017) and later plans to make them switch to a proper human advisory as soon as they have accumulated enough wealth to afford the services. Moreover, Morgan Stanley is undoubtedly not forgetting about the retirement plans that the depicted new potential customer base will need in the future. Morgan Stanley’s strategy is therefore betting on millennials, who will control $20t assets worldwide by 2030, as reported by CB Insights’ survey. Moreover, the high-growth private companies and startups that Solium serves could also potentially rely on Morgan Stanley’s investment banking services for IPOs in the years to come, thus contributing to the company’s positioning in the league-table race.
In few words, the deal constitutes an easy plug-in, mainly backed by a combination of strategic and speculative reasons, that perfectly match Morgan Stanley’s long-term objectives. This deal will sustain the firm in its race against major Wealth Management rivals (above all against Fidelity) and Investment Banks.
Market Reaction
Announced on Monday, February 11th, 2019, the deal brought Morgan Stanley’s shares price initially down 0.7% by 10:33 a.m. New York Time, to USD 40.53. By the end of the same trading day, the share fell by an overall 1.5%, to USD 40.21, which then surged from Tuesday onwards.The announcement had an immediate positive effect on Solium’s share price, which closed at CAD 19.12 (representing a 43% premium to the previous-Friday’s closing price).
The deal addressed investors’ need for steady, subscription-like businesses that will do well both in hot and cold market conditions, especially in a period when higher-octane businesses, like securities trading, are losing profitability and attractiveness. Investors seem unbotheredby regulators’ critiques, which have become increasingly severe in regard to banking sector acquisitions since the financial crisis. According to investors, regulators will never oppose a transaction which would increase the buyer’s stability and unlock future opportunities of growth.
Advisors
Davis Polk & Wardwell LLP and Osler, Hosking & Harcourt LLP have acted as Morgan Stanley’s legal advisors. Morgan Stanley’s own executives are acting as its investment advisors. Solium’s advisors on the deal have not yet been disclosed.
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