Friday, October 9, 2020

Morgan Stanley (MS) to acquire Eaton Vance (EV)

Morgan Stanley (MS) announced that they are planning to acquire Eaton Vance (EV) at a premium to the closing price on Wednesday. Eaton Vance shares went up over 48% on Thursday. I am pretty sure this is close to the all-time-highs for Eaton Vance that were reached in early 2018.

Shareholders of Eaton Vance will receive $28.25/share in cash and 0.5833 shares of Morgan Stanely for every share of Eaton Vance that they own. The deal is expected to close by the second quarter of 2021. Before the deal closes, Eaton Vance shareholders are expected to receive a one-time special dividend payment in the amount of $4.25/share. 

Eaton Vance closed at $60.65/share. Morgan Stanley closed at $49/share. This means that at current prices, Eaton Vance shareholders will receive a special dividend of $4.25/share, cash in the amount of $28.25/share and 0.5833 shares of Morgan Stanley worth $/28.58/share. This comes out to a total of $61.08/share. There may be a few regular dividends in between today and the closing of the deal. At the current rate of 37.50 cents/share, that could be 75 cents if you get two payments.

I have a position in Eaton Vance, both for my personal account and for the premium newsletter I write.

While many folks focus on dividend cuts as risks, acquisitions are another risk to be aware of in a long-term portfolio. They may be as likely as cuts over the long term for a diversified portfolio consisting of quality companies. The risk with acquisitions is that while you get a big premium to get the shares taken from you, you may also be robbed of any future potential that the business would have generated on its own. 

Each Eaton Vance share generates $1.50 in annual dividends. Eaton Vance is a dividend champion with a 39 year history of annual dividend increases. Check my last analysis of Eaton Vance (EV) for more information about the company.

As part of my approach, I have learned to be as passive as possible when it comes to investments. This means that when I buy a stock, I will hold it for as long as the dividend is at least maintained. I sell after a dividend cut or suspension. If a stock is acquired for cash, I have to sell. 

In the case of Eaton Vance, I will not make any elections of whether I want stock or cash, I will go with the default election. 

Let's walk through a situation where I do nothing.

This means that I would likely shares of Morgan Stanley (MS) and some caash when the acquisition closes around the end of first half of 2021. I am not sure if I would receive fractional shares in Morgan Stanley as a result of the acquisition - It is possible that they would be paid in cash instead.  I am going to wait and see if Eaton Vance continues paying the regular dividends until the deal closes.

I would continue reinvesting Eaton Vance dividends received in the meantime however. This includes the regular dividend and the special dividend. Many brokers would not reinvest the cash amount received, so that would likely be invested in the best investments in 2021. Let's hope we are all well, and able to participate. It is also likely that at that time, my broker TD Ameritrade may have migrated my brokerage account to Schwab.

Morgan Stanley (MS) is a financial holding company which provides various financial products and services to corporations, governments, financial institutions, and individuals in the Americas, Europe, the Middle East, Africa, and Asia. It has been on an acquisition spree recently, acquiring ETrade, and now wanting to acquire Eaton Vance. Morgan Stanley is trying to get into more fee based assets, in order to better compete in todays financial markets. It pays an annual dividend of $1.40/share. It has increased dividends for 7 years in a row - it cut dividends in 2009 during the Global Financial Crisis.

Morgan Stanley yields 2.85%, while Eaton Vance yields 2.50%. This deal may actually increase the dividend income from the remaining shares of Eaton Vance. 

The problem with doing nothing however is that this action would increase my fees, when the deal closes some time in 2021. That's because TD Ameritrade has a $38 reorganization fee. Other brokers like Etrade have the same fee, while others like Sogotrade may have a $50 fee. I am pretty confident that this fee would be charged when the deal is completed, and the shares of Eaton Vance are cancelled, and replaced with cash and shares of Morgan Stanley in my account. That's a pretty steep fee for a position. If I was using another broker that didn't charge this fee, I would have likely done nothing. Hence, it is good to check for any hideen fees from your brokerage house. I have been charged this fee by Etrade, when Shire was acquired by Takeda a few years ago. Since commissions are zero today, the best course of action would be to sell. When you keep investment costs low, this leaves more money working for you as an investor.

I just have to decide how I am going to replace the dollars/shares of Eaton Vance. I do have over half an year to decide of course. In the meantime, it is possible that a bidding war could emerge for Eaton Vance, which may increase the price even higher. It is also possible that we get increased volatility in the stock market, and Morgan Stanely is unable to complete this acquisition for one reason or another. If I sell today, I would have a long-term capital gain.

This is perhaps why it is best to invest through a retirement account such as a Roth IRA account for example, in order to minimize the tax drag on dividends and capital gains. Since I may not be eligible to contribute in a Roth IRA every single year until I reach this portfolio objectives, I am using a tax account. If I keep my personal income low through legal means, I may not have to pay taxes on the proceeds and dividends however. Personal tax situations are personal, hence I seldom discuss them here.

So today, I am not going to do anything. I would have personally done nothing, until the deal closes. 

Sadly, my broker would charge me $38 when the deal closes, which is too much in my opinion. If this position was in the hundreds or thousands of shares, it would have made sense. If there was no reorganization fee, I would have not done anything. As it is not, I would very likely sell the stock at some point between tomorrow and June 2021. I would keep reinvesting Eaton Vance dividends however in the meantime. If they stop paying the regular dividend, I would sell the stock pretty much right away. 

Historically, Eaton Vance raises dividends every October, so I was expecting an action by early next week. Let's sit back and see what happens.

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