Morgan Stanley’s CEO explains why the bank’s $7 billion bid for Eaton Vance makes sense even …

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  • Morgan Stanley chief executive James Gorman told analysts on Thursday’s earnings call that his bank paid a steep price in its bid to acquire investment manager Eaton Vance for $7 billion in cash and stock.
  • Nevertheless, he maintained that the deal will bear fruit for the New York-based bank.
  • The announcement of the Eaton Vance deal came just six days after closing its all-stock E-Trade acquisition, which was valued at $13 billion when the deal was announced in February.
  • Gorman seemed to throw cold water on the notion that Morgan Stanley might be entering into an M&A shopping spree.
  • Visit Business Insider’s homepage for more stories.

Morgan Stanley chief executive James Gorman defended the bank’s recently announced bid for asset manager Eaton Vance despite the high price tag of the deal.

Earlier this month, the New York-based bank announced its plans to acquire the Boston-based investment manager for $7 billion in cash and stock.

“I’m not ashamed to say it’s fully priced, but this is a quality asset,” Gorman told analysts on the bank’s 2020 third-quarter earnings call. “We will get the expenses out of this. We will consolidate this. We will generate revenues from it.”

“I’m positive that this deal is going to deliver,” he added.

Read more: Why Morgan Stanley’s $7 billion bid for a storied asset manager gives it a leg up on rivals and signals more deals to come

The announcement of the Eaton Vance deal came just six days after closing its all-stock E-Trade acquisition, which was valued at $13 billion when it was announced in February. The closure of the E-Trade deal and announcement of the Eaton Vance acquisition in such quick succession had some industry watchers wondering if Morgan Stanley might be on the precipice of a buying frenzy.

But Gorman seemed to cast cold water on that theory on the call, and laid out reasons why the Eaton Vance deal — which would beef up Morgan Stanley’s asset management division to $1.2 trillion in assets — makes sense.

“It certainly came hot on the tail of E-Trade,” Gorman said. “We didn’t want to communicate, all of a sudden, we’re trying to do an acquisition week. We’re not. We didn’t control the timing.”

He explained that he is optimistic that Eaton Vance will bolster Morgan Stanley’s fixed income asset management business “in a way that we couldn’t have done otherwise, and it provides us some real growth endurance.”

Gorman also expects to see fund sales go up through the acquisition.

“We have trouble getting our product distributed domestically because we don’t have a strong wholesaling sales force as others do. They do. They have a world-class one,” he said.

Representatives for Morgan Stanley did not immediately respond to a request for comment from Business Insider.

Despite its recent purchases, Gorman signaled that Morgan Stanley is not on an M&A buying spree

On the earnings call, Mike Mayo, an analyst with Wells Fargo, pressed Gorman on the bank’s long-term M&A strategy, suggesting that Morgan Stanley had altered course in recent years, “reversing some of the actions that you took,” Mayo said.

He referred to deals like Morgan Stanley’s sell-off of Van Kampen Investments for $1.5 billion a decade ago.

“We’ve not had a long-term reversal,” Gorman said. “This is not a change in strategy at all. This is about getting scale in the businesses we want to be in.”

Gorman pointed to other instances in which the bank has sold off some of its assets, including its 2011 split from hedge fund FrontPoint; the 2012 sale of resident mortgage loan provider Saxon Mortgage Services; and its 2014 sale of oil pipeline company Transmontaigne.

Those deals demonstrate the bank has maintained a steady trajectory in streamlining other business lines in recent years, Gorman said.

As a result, Morgan Stanley shouldn’t be seen as going on an M&A shopping spree in light of its two recent purchases.

“We have fundamentally … changed the profile of this company to focus on originating, distributing and managing capital for individuals, governments, and institutions,” Gorman said. “That’s what we do, and this is entirely consistent with that.”

Morgan Stanley’s Gorman believes the Eaton Vance deal will generate long-term value prospects

In expressing bullishness for the long-term prospects of the Eaton Vance acquisition, Gorman refuted the notion that the deal wouldn’t yield returns meaningful enough to warrant its cost.

In shoring up his argument, Gorman made a reference to the high costs of past deals Morgan Stanley has made, like the $900 million purchase of software company Solium last year, or its $2.7 billion purchase of Citigroup’s wealth division in 2008, which went on to become Morgan Stanley Smith Barney. (The group was renamed to Morgan Stanley Wealth Management in 2012.)

“If we overpaid by a couple of hundred million dollars [on the Eaton Vance purchase], people said we overpaid Solium by a couple of hundred million dollars. Some people said we overpaid Smith Barney by a couple of hundred million dollars,” he said.

“I take a very long-term view on acquisitions,” he added.

Other Wall Street giants are looking to ramp up deals

Meanwhile, M&A activity has begun to regain some of the rhythm it lost earlier this year as the coronavirus pandemic ground much M&A activity to a halt.

Earlier this week, the chief executives of BlackRock and JPMorgan Chase — the largest asset manager and the largest US bank by assets, respectively — indicated that they were interested in ramping up acquisition activity on their firms’ individual quarterly earnings calls.

Read more:JPMorgan and BlackRock say they’re interested in money-management deals, but they’re eyeing very different targets

“We would be very interested, and we do think you’ll see consolidation of the business,” said JPMorgan chief Jamie Dimon on the bank’s earnings call Tuesday.

And Gary Shedlin, BlackRock’s CFO, suggested on his firm’s earnings call that the rest of the industry is trying to catch up to the portfolio the $7.3 trillion fund manager has already built.

Now, BlackRock is more interested in pushing ahead into new M&A territory, he said on the call, considering deals that “will broaden our technology capabilities, expand our global distribution reach and potentially scale certain parts of our private markets franchise.”

BlackRock is “much less focused on the pursuit of traditional investment management consolidation,” Shedlin added.

Wall Street says it is braced for losses. Now what?

Goldman Sachs and Morgan Stanley, which are more skewed towards investment banking, posted stellar profits. Wells Fargo, a mostly commercial …

As the perils of higher provisions and the spoils from market volatility became less dramatic, investors’ attention turned towards a more prosaic influence on earnings: banks’ net interest incomes, or the difference between the interest collected on loans and other assets and the interest paid on deposits and other funding. These have been squeezed by interest-rate cuts by the Federal Reserve and low long-term bond yields. America’s five large banks earned $44bn in net interest income in the third quarter, 13% less than in the same period last year. All together, reduced interest income, calmer trading revenues and subsiding credit costs meant that profits were lower than they were a year ago, but less starkly so than in the second quarter. Profits fell by 11% across Bank of America, Citigroup and JPMorgan in the third quarter, compared with a drop of 56% in the second.

The question now is what banks will do with their earnings. Regulators, still scarred by the global financial crisis of 2007-09, want well-padded shock absorbers. On September 30th the Fed said that the 33 banks with more than $100bn in assets would remain barred from buying back shares in the fourth quarter. Dividend payments are allowed, in contrast to Europe, but capped. As a result many banks are accruing capital. JPMorgan’s common-equity capital ratio rose to 13.0%, from 12.3% in the third quarter last year. At Bank of America the ratio climbed to 11.9%, from 11.4%. That is about $35bn above regulatory requirements, Paul Donofrio, its chief financial officer, told analysts.

With buy-backs off the table, bosses can either spend or save the cash. Some are splashing out. Bank of America said it had invested in adding branches in the third quarter, pandemic notwithstanding. Others are acquiring new businesses. On October 8th Morgan Stanley announced that it was buying Eaton Vance, an asset manager, for $7bn. That came just days after it completed its purchase of E*Trade, an online trading platform.

The extra capital could also come in handy if the economy fares worse than even the dismal scenarios baked into loan-loss provisions. Banks’ bosses sounded cautiously optimistic that this would not be the case. But investors have their doubts. Banks’ share prices are still a third below their levels at the start of the year.

Roche Shares Trade Lower After Sales Decline

Roche Holding AG shares fell on Thursday after the company reported an on-year decline in sales in the first nine months. The Swiss pharmaceutical …
 By Cecilia Butini 

Roche Holding AG shares fell on Thursday after the company reported an on-year decline in sales in the first nine months.

The Swiss pharmaceutical major said sales from January to September came in at 43.98 billion Swiss francs ($48.15 billion), down from CHF46.07 billion the year prior.

After a dip in the second quarter due to the coronavirus pandemic, sales stabilized in the third quarter, the company said.

A boost in sales was particularly noticeable in the diagnostics division, thanks mainly to PCR tests for Covid-19, Roche said. However, the pharmaceutical division still reported a decline in sales despite some signs of recovery in the third quarter.

At 0845 GMT, Roche shares traded 3.2% lower at CHF309.15.

According to Bryan Garnier, a decline in sales of blockbuster oncology drugs Herceptin, Rituxan and Avastin–which was partly fueled by the commercialization of biosimilars–resulted in Roche missing market expectations.

“We could argue that Roche warned in 2Q already about a larger-than-initially anticipated impact on sales from biosimilars and Covid-19 impacts all together. There is actually more than this,” the investment bank said. It said a downturn in the international region, which includes China, was stronger than expected.

Bryan Garnier analysts expect this trend to reverse in the fourth quarter, however.

Analysts at Citi anticipate that the recovery in the Chinese market “will be slow, extending well into 2021 and proving a continued drag on revenue growth.”

The bank says slumped volume in China, predominantly of Rituxan, Herceptin and Avastin, was driven by travel restrictions due to the coronavirus pandemic, which prevented people from traveling to receive their infusions and lowered hospital turnover.

Roche’s decision to lower prices in China to secure access to the National Reimbursement Drug List also had an impact on figures, according to the company and Citi analysts.

Roche reiterated its 2020 guidance, saying that it expects sales to grow in the low-to-mid-single digit range. It also said that it plans to further increase its dividend in 2020.

Write to Cecilia Butini at cecilia.butini@wsj.com

(END) Dow Jones Newswires

October 15, 2020 05:10 ET (09:10 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

Deutsche Bank launches early warning system for securities settlement delays

Using Elastic’s machine learning technologies will enable Deutsche Bank’s settlement platform to move from real-time to forward-looking, and will …

Deutsche Bank has launched a new service providing early warnings to traders around settlement delays and potential failures in securities transactions.

The new service is powered by Elastic, a search technology firm, where the bank will use its machine learning and anomaly detection features, to enable clients to avoid hefty financial penalties under the upcoming implementation of the Settlement Discipline Regime (SDR) in February 2022.

Using Elastic’s machine learning technologies will enable Deutsche Bank’s settlement platform to move from real-time to forward-looking, and will proactively detect the in-flight transactions that require actions and alert the bank’s teams before the transactions encounter issues.

“Our aim is to deliver a real shift in how markets view exception processing and to bring pre-trade performance to our post-trade operations. We can now detect transactions in real-time that previously would not be flagged as at risk, and divert our attention from the transactions that ostensibly appear to be at risk, but upon historical analysis have always matched in time to settle,” said Christopher Daniels, director, data products, securities services, Deutsche Bank.

Elastic’s anomaly detection feature also takes into account seasonality, market variation and other changing dynamics to provide the bank’s operational teams with dashboards and action queues that are driven by a large set of factors that would be too broad and complex to manually process.

The machine learning algorithms will also complement the development of several dashboards covering liquidity, settlement performance, and risk and control.

“We’re using the platform to identify the most influential features that are more likely to cause a late or failed settlement, and to focus our data quality reviews on activity that does not synchronise with what we would typically expect from a particular cluster. It’s a very exciting time in our data roadmap,” added Daniels.

The new service is the latest enhancement by Deutsche Bank after it launched its current real-time settlement service in Euronext, Germany and the UK earlier this year.

The platform provides its operations staff with a real-time view of the issues that can delay a transaction settlement, a stark contrast to traditional platforms which only provide a retrospective view of what has caused settlement delays.

What You Need To Know About Times Neighborhood Holdings Limited’s (HKG:9928) Investor …

Xihong Bai is the second largest shareholder owning 2.1% of common stock, and The Vanguard Group, Inc. holds about 1.5% of the company stock.

Every investor in Times Neighborhood Holdings Limited (HKG:9928) should be aware of the most powerful shareholder groups. Generally speaking, as a company grows, institutions will increase their ownership. Conversely, insiders often decrease their ownership over time. We also tend to see lower insider ownership in companies that were previously publicly owned.

Times Neighborhood Holdings isn’t enormous, but it’s not particularly small either. It has a market capitalization of HK$10.0b, which means it would generally expect to see some institutions on the share registry. In the chart below, we can see that institutions are noticeable on the share registry. We can zoom in on the different ownership groups, to learn more about Times Neighborhood Holdings.

Check out our latest analysis for Times Neighborhood Holdings

ownership-breakdown
SEHK:9928 Ownership Breakdown October 1st 2020

What Does The Institutional Ownership Tell Us About Times Neighborhood Holdings?

Many institutions measure their performance against an index that approximates the local market. So they usually pay more attention to companies that are included in major indices.

As you can see, institutional investors have a fair amount of stake in Times Neighborhood Holdings. This implies the analysts working for those institutions have looked at the stock and they like it. But just like anyone else, they could be wrong. It is not uncommon to see a big share price drop if two large institutional investors try to sell out of a stock at the same time. So it is worth checking the past earnings trajectory of Times Neighborhood Holdings, (below). Of course, keep in mind that there are other factors to consider, too.

earnings-and-revenue-growth
SEHK:9928 Earnings and Revenue Growth October 1st 2020

Hedge funds don’t have many shares in Times Neighborhood Holdings. Asiaciti Enterprises Ltd is currently the company’s largest shareholder with 47% of shares outstanding. Xihong Bai is the second largest shareholder owning 2.1% of common stock, and The Vanguard Group, Inc. holds about 1.5% of the company stock.

A more detailed study of the shareholder registry showed us that 3 of the top shareholders have a considerable amount of ownership in the company, via their 50% stake.

While it makes sense to study institutional ownership data for a company, it also makes sense to study analyst sentiments to know which way the wind is blowing. There are plenty of analysts covering the stock, so it might be worth seeing what they are forecasting, too.

Insider Ownership Of Times Neighborhood Holdings

The definition of an insider can differ slightly between different countries, but members of the board of directors always count. The company management answer to the board and the latter should represent the interests of shareholders. Notably, sometimes top-level managers are on the board themselves.

I generally consider insider ownership to be a good thing. However, on some occasions it makes it more difficult for other shareholders to hold the board accountable for decisions.

We can see that insiders own shares in Times Neighborhood Holdings Limited. This is a big company, so it is good to see this level of alignment. Insiders own HK$221m worth of shares (at current prices). If you would like to explore the question of insider alignment, you can click here to see if insiders have been buying or selling.

General Public Ownership

The general public holds a 41% stake in Times Neighborhood Holdings. This size of ownership, while considerable, may not be enough to change company policy if the decision is not in sync with other large shareholders.

Private Company Ownership

It seems that Private Companies own 47%, of the Times Neighborhood Holdings stock. It’s hard to draw any conclusions from this fact alone, so its worth looking into who owns those private companies. Sometimes insiders or other related parties have an interest in shares in a public company through a separate private company.

Next Steps:

I find it very interesting to look at who exactly owns a company. But to truly gain insight, we need to consider other information, too. Be aware that Times Neighborhood Holdings is showing 1 warning sign in our investment analysis, you should know about…

If you are like me, you may want to think about whether this company will grow or shrink. Luckily, you can check this free report showing analyst forecasts for its future.

NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.

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