What happened

Shares of asset manager Eaton Vance (NYSE:EV) rallied as much as 48% in early trading on Thursday. The massive gain was holding firm by 11 a.m. EDT. Investors can thank finance giant Morgan Stanley (NYSE:MS) for the price move, though Morgan Stanley's shares were down slightly at the open. But it's not unusual for the acquiring company in a merger to see its price fall. At 11 a.m. today, Morgan Stanley's stock was around breakeven.

So what

Morgan Stanley has agreed to buy Eaton Vance for roughly $7 billion. It is a continuation of a larger trend in the finance sector where more-traditional active management shops are being consolidated into larger entities that are looking to expand their assets under management base. Companies like Eaton Vance, meanwhile, have been facing pressure from low-cost alternatives, like exchange-traded funds (ETFs), that have been growing in popularity in recent years. The pairing-up, in many ways, makes a great deal of sense for both companies. Once finalized, Morgan Stanley expects to oversee $4.4 trillion in client assets.   

A woman raising her arms in triumph in front of a computer

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Assuming the deal is consummated as currently planned, Eaton Vance shareholders will receive $28.25 per share in cash and 0.5833 shares of Morgan Stanley stock for every share of Eaton Vance they own. That places the per-share value of Eaton Vance at roughly $56.50, a huge premium over the nearly $41 per share it closed at on Wednesday.

In addition, Eaton Vance will also pay a special dividend of $4.25 per share prior to the closing of the deal. Thus, as of 11 a.m. EDT or so today, Eaton Vance shares were trading at around $60.50 per share, roughly in line with the full value of the proposed transaction.   

Now what

At this point, the cat is out of the bag, and the price gains in the stock basically fully reflect the deal on the table. Most Eaton Vance investors should probably sit tight or sell the shares to lock in the gains, since sometimes even seemingly good acquisitions fall apart. Long-term investors hoping to get in at this point should think twice, since there's little reason to expect further upside.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.