Morgan Stanley, one of the last remaining stand-alone Wall Street titans, has held merger talks with Wachovia Securities, among other banks, and at least one other bank, according to the New York Times and CNBC. The need for the kind of capital offered by customer deposits apparently is driving securities firms into the arms of banks, as we saw with Bank of America's acquisition of Merrill Lynch on Sunday.
Wachovia Securities is already the second-largest b/d ranked by number of reps. The merger would make it even larger still, creating an army of more than roughly 24,000 brokers. Both Morgan and Wachovia have been hurt in the credit crunch, of course, but Morgan’s private client group is raking in advisors and client money. Wachovia Securities lost $17 billion in client assets in the second quarter. Wachovia bought Golden West Financial in 2006 and A.G. Edwards in 2007.
Some analysts say J.P. Morgan would make a better fit for Morgan Stanley. “From a Morgan Stanley perspective, I would assume there’s only three or four banks that have the capital to acquire Morgan Stanley. Their best fit is with JPMorgan, because JPMorgan has a very good HNW business and the beginnings of a decent investment bank, and is in a great capital position, most importantly,” says Chip Roame, principal of Tiburon Strategic Advisors says.
“The second best fit for Morgan Stanley is probably Wachovia,” Roame continues. “The issue there is that Wachovia already has a 12,000- or 13,000-advisor platform. The additional 12,000 brokers is nice, but not a need of theirs. Wachovia is quite a bit weaker on the corporate investment banking side. My observations would be—if I was a betting man—I would bet JPMorgan buys Morgan Stanley in the next couple of months. Wachovia seems a little undercapitalized right now, but it does have some very strong senior management talent. It has a new CEO, a new CFO and a very savvy guy in David Carroll, who runs asset management and brokerage business. So, they would be able to handle the acquisition.”
These bank-securities firm deals rather vindicate the Citigroup/Smith Barney model, which had been criticized by some shareholders and analysts. They argued that Smith Barney should be spun out of Citi. Incidentally, it is ironic that the government may be encouraging these marriages, since the government separated securities firms, banks and insurance firms in the Depression.
The jury is still out on Wachovia's deal with A.G. Edwards. Wachovia has said that attrition from that deal is very low, at near 3 percent. But some analysts predict the business could lose a mass of advisors and customers starting next month, when one-year "lockup" agreements expire.
One Morgan advisor, who recently moved to Morgan from Bear, said he would not be thrilled about a deal with Wachovia. “I’d really want to work with an investment bank— not a commercial bank,” he said in an interview Wednesday night. “If they keep them separate it will be okay, but as far merging the two I don’t know; I don’t know that I’ll stand for that.”
The problem is, he’s not really sure what options he will have if a merger does go through. “Goldman maybe, but 99 percent of the guys don’t fit with what Goldman wants. Jeffries maybe? There are not a lot of people left for us. Plus, our client assets are safe and to move for the sake of moving doesn’t make sense. I know we will be taken care of.”
He continued, “Two days ago, I was saying how happy I was not to be with Lehman. I would have never predicted this. I looked at the balance sheets for Morgan before I joined and they are still strong.”