On Monday, Morgan Stanley (NYSE:MS) announced it was purchasing Canadian stock plan administrator Solium Capital for $900 million, and let's be honest: Before this week, odds are you'd never heard the name of the target company before. Unless you work for a young company yourself, that is -- Solium handles stock plans and provides financial reporting and compliance services primarily for start-ups. So as an investor, why should this interest you?
In this segment from MarketFoolery, analyst Abi Malin talks to host Chris Hill about three factors in particular that cause her to view this deal favorably: the opportunities it brings to Morgan Stanley, why the timing of this deal is interesting, and why Morgan Stanley is likely interested in Solium's client base.
A full transcript follows the video.
This video was recorded on Feb. 11, 2019.
Chris Hill: Morgan Stanley is buying Solium Capital for $900 million. Solium Capital, based in Alberta, Canada, prepares stock plans for startup companies. Shares of Solium are up 42% today. Good for those folks.
Morgan Stanley, it's their biggest deal since the financial crisis. First, do you like this deal?
Abi Malin: Yeah, I think it's an interesting deal for three reasons. The first is, as you mentioned, Solium Capital is a Canadian company. They provide stock plans for start-ups. I think there's really three big takeaways from this. The first is that Solium provides predictability to Morgan Stanley earnings. Wealth management is a subscription division model for Morgan Stanley. This is an easy plug-in for them. There's cross-selling opportunities. Also, down the line, there could be retirement planning opportunities for these clients. A lot of opportunity from the get-go with this acquisition.
The second thing that I think is interesting is, starting in the beginning of last year, we saw a lot of predicted mergers and acquisitions in the banking sector. We're just now starting to see that tick up. Last week, we had the news about BB&T and SunTrust. This week, it's Morgan Stanley buying Solium. It's an interesting time for this to happen because in the banking sector, you have a couple of positive things going on right now. You have a strong economy, widened interest rate spreads in comparison to recent history, lower credit losses, lower corporate taxes, and a little bit of easing on compliance. But for the negatives, regional banks used to compete with these much larger banks just on relationships. As people have moved more toward electronic banking, that's become less of an advantage. You've also seen these regional banks lack the technology that these larger banks have. The consolidation makes sense. I think we've all been waiting a while for it. I think this deal makes sense from that regard.
The third part is a comment about start-up culture in general. Clients at Solium have included Instacart, Shopify, and Stripe. I think it could be an interesting plug-in to Morgan Stanley's business to see maybe a relationship into IPO mandates, potentially, from Morgan Stanley. That's also interesting because companies have chosen to stay private so much longer and at higher valuations.
Hill: I was a little surprised when I saw that this was the biggest deal Morgan Stanley's made in the past decade. Morgan Stanley, you're talking about a $70 billion business. Not that $900 million is chump change, but it's smaller than I would have bet on. CEO James Gorman was pretty clear about the fact that -- and you touched on this point -- they're looking to do more of these. They're looking to make more acquisitions.
Malin: Yeah. Typically, smaller acquisitions tend to go better. That's the general consensus. So, I think it makes sense. This one in particular is interesting because it bridges that gap between private and public equities.
Hill: The other thing I was struck by, $900 million in cash, the buyout price for Solium is $19.15 a share. When we walked in the studio, Solium was trading at $19.10 a share. That tells me this is something that should go smoothly, and it's not going to be a situation like we've seen over the past couple of months where --
Malin: Regulators are fighting it.
Hill: -- regulators are fighting it, or, also in the financials space, Visa and Mastercard going back and forth battling for this British payments company, Earthport. This looks like Morgan Stanley's got this one locked up.
Malin: Yeah. I think part of that is just competition within the space. It's not necessarily as competitive as some of those other deals that you just mentioned.