Morgan Stanley + Eaton Vance: What's Next?

11/02/2020 5:00 am EST

Focus: FINANCIALS

Kelley Wright

Managing Editor, Investment Quality Trends

On October 8th, Morgan Stanley (MS) announced it was acquiring Eaton Vance (EV); as the latter was a constituent in our Timely Ten portfolio, many of our readers have asked whether they should sell now or wait for the deal to close, explains Kelley Wright, editor of Investment Quality Trends.

Under the terms of the merger agreement, Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833x of Morgan Stanley common stock, representing a total consideration of approximately $56.50 per share.

Based on the $56.50 per share, the aggregate consideration paid to holders of Eaton Vance’s common stock will consist of approximately 50% cash and 50% Morgan Stanley common stock.

In addition, Eaton Vance common shareholders will receive a one-time special cash dividend of $4.25 per share to be paid pre-closing by Eaton Vance to Eaton Vance common shareholders from existing balance sheet resources.

It is anticipated that the transaction will not be taxable to Eaton Vance shareholders to the extent that they receive Morgan Stanley common stock as consideration.

Clearly, EV is sporting a nice capital gain, and at almost $62 per share it is trading at a premium. If you wait for the transaction to close you will continue to receive the regular EV dividend, and there will be the one-time special dividend as well, although it appears the special dividend has been baked into the current price, which is not guaranteed to hold.

Per the announcement there will be a procedure to receive all stock or all cash, but the stock portion will not be taxable. For investors that hold EV shares in an IRA or other qualified plan there are no tax consequences whether you sell now or take the distribution at the close.

For investors that hold EV shares in a taxable account and sell before the last trading day in December, there will be a capital gain due next April. If you sell in January, the capital gain will be due in April 2022. If you elect to take all Morgan Stanley shares there will be no tax consequences until you sell the Morgan Stanley shares.

Morgan Stanley is a Select Blue Chip and is currently in its Rising Trend with a theoretical upside of 91% to its low yield Overvalue target of 1.45% based on the current dividend.

Clearly, Morgan Stanley is bullish on its business as it also bought E-Trade earlier this year. There have been other acquisitions in this space with Charles Schwab (SCHW) buying TD Ameritrade, Goldman Sachs (GS) purchasing Folio Investing, and Franklin Resources (BEN) acquiring Legg Mason, so bullishness abounds.

For those of you that wish to speculate on continuing merger mania, potential targets could be State Street (STT), Franklin Resources (BEN), or perhaps Lincoln National Corp. (LNC). Caveat emptor.

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