Morgan Stanley has agreed a $13bn deal to buy E*TRADE , an online trading platform. The deal is the largest by a global bank since the financial crisis, and the second biggest by Morgan Stanley.

Through this acquisition the bank will expand its client base, adding stock trading millennials. This is crucial, as E*TRADE is somewhere that not only wealthy investors can trade. It is also used by general consumers, rendering the acquisition of absolute importance.

E*TRADE  has more than 5.2 million clients with assets totaling around $360bn on the platform. This represents a huge opportunity for Morgan Stanley. The acquisition marks the company’s entry into an online market where rivalry is strong and competition is fierce. Therefore, a big brand name and support from a major bank can make big difference.

However, this is not only an expansion plan for the bank. It enables Morgan Stanley to battle its rival Goldman Sachs. The latter has gained American consumers from Morgan Stanley due to its mass market wealth management business and online bank.

However, even though the acquisition appears to be a very good strategy for Morgan Stanley, investors initially had a different opinion.

Share price fell on E*TRADE news

Morgan Stanley’s stock price decreased by 4.5% since the news of the acquisition broke. The bank’s stock price experienced this decrease under two days, which is not a significant decrease under the time frame. However, it is a very good indicator of how investors reacted to Morgan Stanley’s recent deal.

Investors sold their positions during those two days mainly because the deal could reduce Morgan Stanley’s tangible book value per share by 10%. This was because the deal was struck at 16 times E*TRADE ’s earnings and the bank only trades at ten times earnings.

However, Morgan Stanley has claimed the deal will slightly hurt earnings per share in 2021, before breaking even in 2022 and improving earnings in 2023. This statement wasn’t enough for investors, as they sold their positions right away.

Although the deal will hurt Morgan Stanley in the short-run, investors have to consider that the acquisition will bear greater fruits long-term .

If the deal is approved by the regulatory authorities it will grant to Morgan Stanley access to a vast online market, where millions of people trade everyday with few restrictions.

Even if the deal damage’s Morgan Stanley at present, it could help greatly the bank in the years to come. This is something which investors must think deeply about before making a financial decision.