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Morgan Stanley : Bets On Wealthy Of Tomorrow

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02/12/2019 | 02:48am EST

By Liz Hoffman

Morgan Stanley is making a play for the thousands of employees in the startup economy who might one day be millionaires.

The bank will pay $900 million to acquire Solium Capital Inc., which manages the stock that corporate employees receive as part of their pay. The deal is the largest takeover by any major Wall Street firm since the crisis.

That it comes in stock-plan administration, an unglamorous and humdrum business, reflects sweeping changes in the decade since. Higher-octane businesses such as securities trading are less lucrative and less valued by shareholders, who instead want steadier, subscription-like businesses that will do well in hot markets and cold.

Solium's 3,000 corporate clients have one million employees and include startups such as payments firm Stripe Inc. and delivery service Instacart Inc., whose workers tend to be younger and have fewer relationships with banks. The luckiest will become millionaires overnight if their companies go public. Others could get wealthier over time and buy houses, plan for retirement and invest in the market.

Chief Executive James Gorman is betting he can convert them into clients of Morgan Stanley, whose wealth arm manages $2.3 trillion for 3.5 million American households.

"Most people's money is coming through their workplace, so it's an obvious place for us to be," Mr. Gorman said in an interview.

Morgan Stanley's existing stock-plan business has about 330 corporate clients including Microsoft Corp. and Ford Motor Co. and covers 1.5 million employees. But it is geared toward top executives rather than rank-and-file employees, and Fortune 500 companies rather than startup darlings.

"We didn't historically have a way to serve them," Mr. Gorman said. "Now we do."

Morgan Stanley will pay 19.15 Canadian dollars a share for Calgary, Alberta-based Solium, a 43% premium over its Friday closing price of C$13.36, or about US$10. The stock closed Monday at C$19.12.

Morgan Stanley expects the deal to close by June 30.

The price tag "might raise a brow, but we think this makes significant strategic sense," said Glenn Schorr, an analyst with Evercore Partners. "Our gut is this is a win-win...as advisers might get a ton of new clients handed to them over time."

Solium can feed other parts of the bank's business. Its client roster includes startups that Morgan Stanley's investment bankers are eager to take public, and companies whose pensions and spare cash the bank can manage. When employees go to sell their shares, they will do so through Morgan Stanley's trading desk.

Mr. Gorman, Morgan Stanley's CEO since 2010, has sounded more acquisitive as he stabilized the bank and increased profits. The bank bought a real-estate investment firm in 2018 and has been scouting larger asset-management deals.

"Last year was the first time we felt comfortable that we could even consider [acquisitions]," Mr. Gorman said. "We'd like to do more."

Regulators appointed by President Trump have signaled they are more open to acquisitions by big banks.

Solium is the largest corporate takeover by a major Wall Street firm since the financial crisis, when shotgun weddings hastily arranged by regulators reshaped the nation's largest banks.

Today's deals are more likely to be in businesses that require little capital and throw off subscription-like revenue. Stock-plan management fits the bill. Companies pay annual fees to administrators, which also collect fees from employees when they sell their stock or exercise options.

Morgan Stanley once considered getting out of the business, where it was a distant competitor to Fidelity Investments Inc. and E*Trade Financial Corp. and lacked the digital offerings to serve less-wealthy clients. In 2016, after losing a number of top corporate clients, it outsourced its contracts to Solium.

Meanwhile, Morgan Stanley launched an online wealth-management tool, where it can now park smaller accounts until they are big enough to merit a human adviser. Employees in Solium's plans will start out there, said Andy Saperstein, who co-heads Morgan Stanley's wealth business. "We can incubate those relationships," he said.

In the long run, Morgan Stanley will likely need to beef up its banking products to do more business with those customers. It doesn't have checking accounts or its own credit cards and has a small mortgage operation. It is also likely to expand its 401(k) business to better compete with Fidelity, which offers more of a one-stop shop for corporate HR executives.

Rival Goldman Sachs Group Inc. is also pushing into workplace wealth in search of steadier revenues. The firm is expanding its Ayco business, which offers financial and tax advice to corporate executives, down through the employee ranks, and has built employee financial-wellness websites for companies including Alphabet Inc.

Solium earned C$81 million in revenue through the first nine months of 2018, up 29% from a year earlier. Its stock, up 30% over the past year, closed Friday within a penny of its record high. It has a contract with UBS Group AG's wealth-management arm, though it couldn't be determined whether that will continue after the acquisition.

Morgan Stanley said the acquisition wouldn't have a meaningful impact on its 2019 earnings or reduce its planned stock buybacks. The bank has regulatory approval to repurchase $2.6 billion in shares before June 30.

Corrections & Amplifications Morgan Stanley's wealth arm manages $2.3 trillion for 3.5 million American households. An earlier version of this article omitted the word million. (Feb. 11, 2019)

Write to Liz Hoffman at liz.hoffman@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
MORGAN STANLEY 3.12% 41.99 Delayed Quote.5.90%
SOLIUM CAPITAL INC. -0.16% 19.12 Delayed Quote.62.17%
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Financials ($)
Sales 2019 40 813 M
EBIT 2019 11 447 M
Net income 2019 8 168 M
Debt 2019 -
Yield 2019 3,11%
P/E ratio 2019 8,48
P/E ratio 2020 7,78
Capi. / Sales 2019 1,77x
Capi. / Sales 2020 1,72x
Capitalization 72 229 M
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Mean consensus OUTPERFORM
Number of Analysts 28
Average target price 51,3 $
Spread / Average Target 22%
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Managers
NameTitle
James Patrick Gorman Chairman & Chief Executive Officer
Thomas Colm Kelleher President
Jonathan M. Pruzan Chief Financial Officer & Executive Vice President
Bjarne Stroustrup Managing Director-Technology
Katy L. Huberty Managing Director-Research
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