Morgan Stanley Agreeing to Buy E*Trade for $13B

Week on iTunes, SoundCloud, or Bloomberg dot Com. You can also listen to our radio show weekdays at two pm Eastern only on Bloomberg Radio. You are listening to Bloomberg Business Week Live at n j I T here in Newark, New Jersey. Much more to come from here, but also a big, big deal that we've got to talk about. Man. I saw this, and I wasn't surprised because there's been so much consolidation, certainly in the money management area that you know, move to be bigger, right, and we keep

seeing it. So Morgan Stanley diving deeper, specifically into retail buying each rade. It was a thirteen billion dollar deal, So uh yeah, this certainly got our our attention, right. Channali Bossa caught up with James Gorman, cy of Morgan Stanley to get his We're gonna hear from her and from him later on, and we're also gonna hear about um the aftermath of last night's Democratic debate heated. You could use a lot of words, sparks flying. Uh, So we're gonna get into that. It's a blood bath. I

think it's one way I've heard it described. We're gonna do that, and then back here, we're gonna have the president, our host join us talk about what's going on in the world of higher education, also the future of work. That's sort of the theme that we're going to be going forward today. President of n j I t CEO of top Coder, and also the key executives are some key executives I should say at Nokia, Siemens and Mark

and yes, you're right, Jason. It's all about focusing on science, innovation, entrepreneurship when it comes to startups, industry, and then what does it mean for workers out there? So looking forward to that. All right, let's set the Business week agenda. In the meantime, a lot to talk about in the markets today. We talked about the deals and you also heard the numbers from Charlie Pellett on the Trade Gina

Martin Adams there in our Bloomberg Interactor broker studio. She of course is the chief equity strategist for Bloomberg Intelligence, and she's there with Dave Wilson, our Stocks editor of the throw the chart in Stock of the Day, Gina, I want to start with you, what's the one thing investors are thinking most about today as they try and assess what's going on in the market. You know, I think a couple of issues have really come up over the last couple of weeks that are still weighing on

investors minds. The first is is tech overbought the market? So much on the markets concentrated and gains have been concentrated in the tech sector. In particular, the biggest stocks in the tech sector, you know, Microsoft and Apple now together worth more than the entire Russell two thousand combined. Has some investors kind of running for the hills and a little scared of tech. The second thing I'm hearing about is kind of this underlying market condition where low

volatility stocks are actually still outperforming. You know why is utility is the only sector that's outperforming with tech in such a strong manner over the course of this year. And then lastly is when are we going to buy the dip and energy? And this is what we focused a lot of our research on this week is kind of you know, is the energy sector actually cheap? Is it all about E? S G? Where what do the multiples say about energy? And can you dip into this

extremely underloved space. Well, and I love what you said about energy. I saw that research, Gina, and you're kind enough to share it with us. But you know, maybe that the energy sector isn't as cheap as valuation suggest right, just because something is cheap, maybe there's some really strong fundamental reasons behind it, which maybe means it isn't still

a buy. Yeah, it's I mean, it's kind of fascinating, right, because investors have pointed to valuation ratios being now nearly a standard deviation below five year average as one of the reasons why you want to look at the space as potentially deep value. But when you look at the the energy sector's history, the counter cyclicality of the pe

ratio for energy actually suggests that it's not cheap. And where you want to buy energy is when it's supposedly expensive based upon valuation multiples, So that argument just doesn't

work as a catalyst. I think the other thing you want to watch is, you know, frankly, even though energy looks relatively cheap in comparison to the rest of the end, it should be cheap with such a low r o E. So even if you exclude the counter cyclicality in the earning stream and you think about things like what's the price to book for the energy space, Well, it's at about one and a half times earnings. Okay, that seems cheap relative to the SMP, which trades at a price

to book closer to three and a half. But considering the low return on equity you get out of energy stocks, price the book should be one. So you know, I just think you really want to dig into the data a little bit more carefully. Yeah, it's only three and a half percent of the SMP five DRED. It's been on the slope of hope, just constant negative price performance, eventually at may bottom. But just saying the stocks are cheap probably isn't the catalyst you need. Alright, slope of hope.

I feel like that's a band that Dave Wilson probably has some vinyl from that he's gonna play this weekend. Dave Wilson, come on in here. What are you seeing in the trade that you feel like should be top of mind? Well, really, it's kind of a takeover Thursday, you can put it that way. I mean each trade very much front and center as far as that goes.

You got the requisite decline and the shares in Morgan Stanley in response to their deal, and then you look beyond that, I mean you see Marathon Petroleum up four percent. We have people familiar with the matter telling us that there are now exclusive talks with the owner of the convenience store chain seven eleven about the potential sale of the gas stations under the Speedway name for about twenty two billion dollars. So that's definitely proven to be a

plus for that stock. And then there's l Brands, I mean, which is a fascinating content himself. Yeah, I mean, selling Victoria's secret at stake to the private equity firm Sycamore Partners in value at just one point one billion dollars, and it's a company that even today has about six and a half billion dollars in value, which just tells you how much things are kind of eroded a Victoria's secret, at least in the minds of l brands. So they make the deal in the stock falls, you know, which

is really telling as well. So you know, we've got the good and the bed and then you can throw in, you know, the first Starney's report out of Viacoms CBS since their deal got done in December, and the shares are down those numbers from the fourth quarter worst performing. Yeah, hey, Gina, what does it mean when you're seeing still, you know, deal flow happening right M and A activity. I always trying to, you know, balance that out with what we're

seeing in kind of market activity. Does it say where we are in this market cycle? Does it tell us about the health of the market it side to you, you know, I think that uh M and A continuing is a combination of very very low rates which allow access to capital, plenty of cash still sitting on corporate balance sheets, and an intensely competitive environment where companies are finding it more difficult to grow organically and looking for an opportunity to buy growth, to tack on growth, to

find some higher growth areas of business. Simply because the economic environment is very slow. It's not indicative necessarily of what where equity prices are going to head. It usually tends em and it usually tends to improve as the cycle progresses and peak at the peak of the cycle. But you know, as we all know, predicting when the peak of that equity mark its cycle is is notoriously difficult.

So I'd just say it's a reflection of the competitive landscape, slow growth and very very easy access to capital more than anything else. Alright, Our thanks to both of you. Dave Wilson, stocks editor for Bloomberg, you'll be back with us at the bottom of the three o'clock hour to

talk about your chart of the day. Our thanks to to Gina Martin Adams, chief equity strategist for Bloomberg Intelligence, writ down among presentians, coffee beans grow by, So that we are going to talk about coffee probably taking for granted, just assume it's going to be there, But there's a lot that goes into it. And this story that's in Bloomberg Business Week is about crop software that's actually behind that daily cup of coffee. Let's get into the story.

Jillian Goodman is an editor at Bloomberg Green. She joins us along with Jim Allie, whose deputy editor of Bloomberg Business Week. Both of them back in our Bloomberg Interactive Broker studio in New York. Love this story. Fascinating story. Um, Jim, let's start with you. I don't know how did the story come to you? I think it was came directly

from Amanda. Amanda Little, the writer of the piece. She published a book last year called The Fate of Food, I think, the Future of Food, and so she's done a lot of yes, So she's done a lot of reporting and writing about these things that are trying to envision in Okay, you know all of the variables that are affecting our global food supply, be it you know, climate change or trade pressures and whatnot. You know, how is that going to change the way we eat or drink?

And so, why why is coffee so interesting to you guys, Jillian? So, coffee is actually a really finicky crop, or at least the kind of coffee that that goes for a higher price that producers need to sell to make a living. Um, it grows only in a very particular region and requires very particular conditions, and it's not the kind of thing where you know, if that regions suddenly becomes inhospitable, they

can just move. Really, the only place they can move is higher up these mountains with that that have the soil that these things grow in, and so eventually they will just run out of dirt. These are the kind of stories I love that Business Week does, right because who knew this was going on? Jim, come on in on this because it's actually a software company, right that

is helping out some of these growers. Yeah, I mean one of the you asked what was so appealing about the story, one of the things that really attracted me about it was the it's a it's an incredibly complicated system. I mean, it's a simple outcome having a cup of coffee, but it's it's just uh, what was it coffee being changed his hands like six times? Preposterous. Yeah, it's really really complicated. And I love stories that that show that that basically provides some clarity and a little bit of

simplicity and on something that's complicated. Well, and Jim, it's funny you know reading this, like even just reading sort of the top of it, it takes me back to like the days when you and I first worked together at eat company now right, it's like, oh, there's this cool company called Cropster, and like back in those days, is it would have been this like overly simple thing where you're like, okay, yeah, like cool name. But this is,

as you say, like really complicated. This feels like a really good use of software because it does, to your point, sort of break down this very complex thing. How does this fit into the sort of broader tech landscape that I feel like, you know, really well, it's coffee as a platform, you know, it's uh, I think I think it's taking They're basically doing the full stack, you know, from the from the from the beans themselves, the plants themselves,

all the way up to the roasters. Well that's one of the other really interesting things about this company is that it started on the coffee producer side to try and help them, you know, make money from their beans, but where they've really found their revenue is on the

roaster side. They've also developed the software that helps roasters really on a granular level, control the roast of their beans, which is why suddenly your neighborhood coffee shop is roasting their own means where you know, it used to be that they couldn't have the capability. Also in this case, I think it's but it's not a oh I was going to say. The the technology also in some ways is could end up as a kind of an equalizer, basically shift some of the power back to the growers themselves,

which which I think is interesting and important. Well, and you know, really important too is global food supplies. Right, And it's not just maybe perhaps with cropster. You know, um, it's not just about coffee guys, right, Jim or or Jillian, either of you can take this. I mean it should chocolate eventually. Staples, right, he really has a global vision for this because you know what's happening in the coffee belt where the climate is a little more finicky, It's

not just there, It's happening all over the world. And so eventually, you know, producers will need to adapt and will need to find new markets for their product, and and on the other side, people will need to find new growers. You know. One other thing that another thing that really fascinated me about this is it's kind of the software has sort of become a secret ingredient for pretty much everybody at a certain level of the industry.

I mean, every roaster uses this. I had no idea, and I love pieces that reveal something about how the world really works. So what does the software actually do, like, how does it operate? What does it do for for a grower? So for a grower it allows them to well, it also encourages them to track certain data points about their crop that roasters are going to be looking for.

So historically this has all been very low tech. I think we have a quote in the piece someone talking about how people didn't even measure the moisture content of the beans when they were deciding okay, are these ready to be shipped out? They just took a bite, you know, there were no sensors involved. And that's the kind of thing that will that allows you to charge more for

your product. And so it's everything from you know, the moisture content to the beans, to the content of the soil, will to how long have they dried before they go out to roasters and all of that just allows them

to make a better sales pitch. Well, the other thing we point out, which I feel like anyone who's listening and watching will will really recognize, is this notion of sort of the waves of coffee and and Amanda do Iss a great job of describing first wave of big brand that's the Maxwell House and Folders, the second wave Starbucks and Pete, and then you know this third wave that we're really in the midst of, and it it plays much broader. And Jim, I know, you uh and

Jillian both see this. You know, this idea of a boutique uh sort of culture where we really care about where it's coming from. We want to know a lot more transparently about what we're eating and wearing and all of those different things. Right. It's also coming out of time right where climate change is threatening. You know, so many different crops around the world, right, and so you know, potentially, Jillian, this could be something that could help with that. Absolutely.

Well into Jim's point, a lot of the really expensive coffee, those proceeds don't go back to the growers, they go back to all of those six people and supply. Yeah. Yeah, it's a really good point. Well, it's a great story. Thank you both for joining us. Jillian Goodman is an editor over at Bloomberg Green. She was in her Bloomberg Interactor Broker studio alongside the great Jim Ailey, Deputy editor of Bloomberg Business Week. Who I know. Love the fact

that I referenced back to E Company. Now that's where he and I first met as a startup magazine back in the day. Best will back me up on this best startup party ever pack Bell Park, the Bear Naked Ladies play. Come on, it was the best. Yeah, you still have the hat? You still have that. I still have the I don't have the free palm pilots that we handed out, but I do have the pilots. Yeah. It was quite I still have a picture of me at home plate anyway. All Right, all right, appreciate it,

Jamally and Jillian goodmanute. This is Bloomberg Business Week with Carol Masser and Jason Kelly on Bloomberg Radio. Some deal news though. Today Morgan Stanley agreed to buy a discount brokerage, E Trade Financial, a thirteen billion dollar deal really pushing further into the retail market. It's biggest acquisition for Morgan Stanley since the financial crisis. Earlier are Schnelli Bossa caught up with Jim Gorman, of Chairman and CEO of Morgan Stanley.

Here's what he had to say. I've always felt that the trade was an incredible brand and incredible company, had great technology. We're clearly doing stuff on the digital side at a pace that was ahead of where we were. So we had that constant debate of sort of build verses by, and you know, we felt we're in the condition to make a bold move and we went for it. James Gorman, of course, the chairman and CEO of sometimes you call him Jim Jim. I didn't know where that

came from. Jay Dog. Yeah, we've talked with him, spent some time with him. Also spent some time with him. Of course she did the interview this morning. I'm calling him Jim. I don't know where it came from. Shinnally, she's Wall Street reporter at Bloomberg News. She's back in her interactive broker studio. I'm blaming the cold medicine today. Um, so this was a big deal. We're seeing, we continue to see consolidation within this industry. Huge, huge, huge. You know,

I asked him was the biggest deal? It was just the biggest day of his life. He said, you know, it was this and Smith Barney back in two thousand and nine, and we have not seen a US bank make a deal like this as you know, since the financial crisis, everyone on Wall Street of scratching their heads. Some of them see the rationale immediately, and some of them are still wondering whether this is the right thing. Yeah, so laid that out for us. Shinali like, why does

it make sense? And why are people For those who say yeah, a good deal, what are they saying? And for those who are like what what do they saying? So on one hand, he wants to build a full scale digital bank. For many years now Morgan's they only had a wealth manager with many trilli of dollars under management. However, what they weren't doing was making that into a full scale bank. They weren't doing checkings and savings and a whole lot of lending. They wanted to do more lending.

But now they have that opportunity. Now they're also going more downstream in terms of what their clientele looks like. They used to only manage wealthy and very very very wealthy individuals money, and now they are really trying to become Bank of America. But for the people who are more and that and that, Oh sorry, well I was just gonna say, let's let's let's go down that road.

For a second. I mean that that really struck me too, is that, like this is trying to be more like B of A than say Goldman, Right, So this is that that is the one thing. Is this an offensive or is it a defensive deal? Because you do have Golden Facts that also wants to be a big wealth manager, a big consumer bank. So you can do that yourself by doing a partnership with Apple, for example, or you

can market fifteen billion dollar deal. So Mike Mayo Wells Fargo called the deal value destroying, saying that with an estimated three point one billion dollar stock premium, you're only going to get one point six billion dollars of savings. So financially doesn't make sense. It's just wrote a lot of value when you look at Morgan Stanley stock today because investors, I mean, I know it's been a lower market overall, but investors certainly weighing in and they're not happy.

So what is it going to be? Key? I always thinking a deal like this when there's so much skepticism out there, shinale, what will be kind of I don't know. If Mike laid out some metrics that he wants to see as a result of this combination in six months or a year. What do we have to see to know that it's working well? This is the thing. Morgan Stanley even told you it's going to take some time.

Morgan Stanley said it will take three years before this deal is a creative which is why on the face of it, immediately it's really hard to say, hey, I love this deal. And also they said they were wanting to stick to their buy backs. But this is a very expensive deal. So over the longer term, over the next couple of years, how much money can they return to shareholders even if this deal makes a lot of sense.

I love Shrine Natarajans our colleague. That's trending so high on the most red list right now, Shinali where uh he talks about you know, Morgan Stanley betting E trade will dodge the Dean Witter jokes um and and I'm just gonna read the lead. Morgan Stanley's murder of quarter century ago with a brokerage that had branches and sears was met with sneers. Wall Streeter's joked it was a deal combining white shoes with white socks. I mean, that's

kind of amazing in a way. Right. Do you remember they used to call it stocks and socks because they would try to sell stocks and sears branches. Uh. Yeah, it didn't really work that well, did it? And so will it work this time around? I remember, just a couple of months ago, I was sitting at a lunch with the former Morgan Stanley in Weston banker, one of the top bankers in the world, and he started joking because you know what makes Morgan Stanley so successful? And

I say what? And he goes the stock brokers, he goes all those people around America that are pedaling with stocks, and you know that that is a tough one because you remember when Morgan Stanley, if you think about it, it's also one of the world's top investment banks. Gorman said he owns a pair of jeans. He's not worried about the culture clash. But is that true? Let's see

how that played out. But but I mean, we know the train had to do something right because of the TV marriage trade and Schwab hook up, so we knew the trade was on the hunt. But it's just interesting that Morgan Morgan Stanley was the one who did it. And you know what does that mean for now others. What does this mean for interactive brokers? What does this

mean for Robin Hood? I think it could become a real problem because you see Wall Street playing the stating game and matching up very quickly, and there are other firms that you start to question does this business model work. The thing we didn't talk about about the trade was the fact that fees are going to zero, and so Morgan Stanley does get scale. They have a three trillion dollar asset manager now compared to two point six trill in at ubs. So that's great. How do you make

money off of those clients? That's the question, right, Yeah, and those are very different kind of asset managers, as you know, far better than we do. All right, Shinelli Bask, Thank you so much. Great interview with James Morgan, ro Marc a journal. Yeah but you let me drive. Oh no, no, no no, non please, I'll do the road rivals me. I want to drivel, Just drive, baby, it's the questions trying.

This is the Drive to the Globe Community. Thanks. We'll drying us on Bloomberg Radio and it's time for the Drive to the closed. Markie Patel back with US, senior portfolio manager for Wells Fargo as set management. They look after more than half a trillion dollars five hundred nine billion dollars. Give her takes, She joined on the phone from Boston. All Right, Margie, we're feeling pretty good about this market the last day or two when here comes a little bit of a bearish feel. What are people

thinking out there? What are you thinking? Well, I'm thinking this is just another one of those minor little shades that we have that never follows through and correction. We hit the market us down a lot more this morning, it's already come back, and when you think about all the negatives out of China, it really telegraphs the fact the market has tremendous Southern life support and really wants

to go higher from here. I do wonder at some point, obviously we're going to get through, you know, hopefully sooner rather than later, the coronavirus, right, and we'll have a stop to it and we'll know kind of the final cost. I do wonder when you start to take that out, when you look at the fundamentals that are out there, Margie, is it a good Enviro pernament for the equity markets? Well?

I think it's Okay, it's good enough with interest rates continuing to be at these very low levels one to two percent, and I think that's a good enough back drop. The set is committed to liquidity to make equities outperform um the fixed income classes, particularly treasuries. And this was really, i'd say, a pretty mediocre earning seasons after all, So we didn't say much of a negative correction from that.

And so what do you make of earnings going forward into the next quarter of excuse me um, you know, especially given maybe some of that backdrop of the virus and that's starting to play through even you know, the lakes of Apple and other big names. I think the market will look and differentiate and say which of those names have a temporary hit because of the China virus

and will bounce back going forward. And what's important to me as the fact we had the pretty much globally monetary authorities have the East over the last year, and it will take a quarter or two for that easing to flow through into better economic growth. So we may be pretty much near the the bottom rate and economic growth trying to take in a little downtick, and maybe we may see somewhat better growth in the second half of the year, so again that would support equity prices

up from here. What's interesting you like another guest that we had earlier in the weekendink it was Henley Smith who talked about UM believing that many investors are still underinvested in the equity markets. I think Henley specifically talking about cash on the sidelines. What's out there that tells

you that there's cash on the sidelines. Well, I think not only is there cash on the sidelines, but there are billions of dollars i'd say trapped in low vall low volatility strategy as a reaction to the financial crisis and O eight that is still poised there waiting for the big correction to jump in. Big correction is never UM.

This money is gradually going to be flowing out of those low volatility, low return sectors into the equity market, and I think that's what's really providing the floor where we don't really see any big equity correction even when we get bad news. And so what sort of sector has become appealing in this type of market markie low interest rates and you know, maybe a slower earnings growth and all the things that you describe where do you

put your money. Well, we're still sticking with what looks like secular growing areas, so that is technology, health care, and certain parts of the industrials market. We also think the utility sector will continue to be at least an average performer, which is pretty good because they should have mid single digital earnings growth plus dividend yield. So we think that if we are looking at say eight ten type of toll return for the year, those sectors all

be very competitive. Well, and I do wonder though, then in this environ meant um, what's the mix you know, or how much do you want to kind of throw in cash at this point? I mean, what's what's the part poliomics that you're looking at right now? Well, we're pretty fully invested, and as I said, I wouldn't be surprised to see some of the cash on the sideline

come in because returns are so low. But also these other parts of the financial markets that have really perspectively very low rates of return finally throwing in the towel and now locating more money into I think US equities because I think the US market still has the best fundamentals globally, so I think we'll still see money domestically plus foreign money come into the US equity market. Margie, how soon in do you start to make decisions based

on the political climate. Well, I think we have to sort of round the bend on mid year and see who the candidates will be from the two major parties. And uh, I'm not putting any money yet on the elections either way, too, we have much clearer picked. I may even wait until we see the election and see where that really leaves us as far as UH is, what the opinions are towards government action, little effect the financial markets. All Right, We're gonna leave it on that now, Markie,

thank you so much for your time today. Market Patel, she's senior portfolio manager at Wells Fargo Asset Management five nine billion dollars in assets under management and joining us on the phone from Boston. Thanks for listening to Bloomberg Business Week. You can subscribe to the podcast on iTunes, SoundCloud, or Bloomberg dot com. You can also listen to our radio show every weekday at two pm Eastern only on Bloomberg Radio