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KBW: Goldman, Morgan Stanley deal for E*TRADE not feasible on financial impacts

While Goldman Sachs Group Inc. and Morgan Stanley could expand their retail offerings and achieve cost savings with an acquisition of E*TRADE Financial Corp., a deal would not be feasible due to financial reasons, Keefe Bruyette & Woods analysts said in a research note.

KBW analysts Brian Kleinhanzl, Michael Brown and Matthew Gruseke wrote that Goldman could expand Marcus with an E*TRADE deal. The company could also see a larger flow in its trading platform, lower funding costs and an increase in lending activities among the trading platform's client base. However, Goldman would see meaningful dilution in its book value even with a sharp decline in E*TRADE's stock price.

"Based on our assumptions for 50/50 cash and stock deal, 25% premium, 50% cost saves and 10% revenue synergies, an acquisition of ETFC would have a 16-year earnback on tangible book value dilution," the analysts wrote. They also estimate an all-cash deal would have a seven-year earnback period.

The analysts wrote that Morgan Stanley "could add a self-directed online platform" outside of its robo-adviser offering if it acquires E*TRADE. The company could also see cost savings in its trading platform and a larger deposit base, which would reduce its reliance on short-term wholesale funding. However, KBW analysts noted the deal would provide few benefits for Morgan Stanley's wealth management business.

Kleinhanzl, Brown and Gruseke said a cash-and-stock deal with the same assumptions used for Goldman would result in a 14-year earnback period for Morgan Stanley, while an all-cash deal would result in a six-year earnback period.

"In addition, with both brokers trading near tangible book value, we believe that shareholders would prefer buyback versus an acquisition as a better use of shareholder capital at this point in the cycle," the analysts wrote. "Thus, we see a deal for ETFC as unlikely given financial and capital impacts (depending how deal is structured) and would be surprised if either broker aggressively pursued [E*TRADE] as an acquisition."