Citigroup and Morgan Stanley finally announced the deal that everyone has been talking about since late last week: the merger of Citi’s Smith Barney brokerage unit with Morgan Stanley’s brokerage operations. The deal can be thought of as a slow motion sale of the brokerage business to Morgan Stanley, which will have rights to acquire the entire business over the next five years.
- Morgan Stanley will control 51 per cent of the joint venture with the right to increase its share in future years.
- The deal turns Morgan Stanley into an immense brokerage powerhouse. With 20,0000 financial advisers, Morgan Stanley will now control the nation’s largest brokerage firm. Merrill Lynch, now part of bank of America, was the leader with 16,000 brokers.
- Client assets of $1.7 trillion.
- Morgan Stanley will pay $2.7 billion dollars to Citigroup. The payment is to make up for fact that Citi is contributing the larger business while taking a minority stake in the joint venture.
- The deal provides Citigroup with a capital boost far beyond the payment from Morgan Stanley. Because of accounting rules, Citi’s 49% share of the combined entity will have an accounting value far more than the value at which it had list Smith Barney. In essence, the deal creates a new price for that business, allowing Citi to write-up the assets by billions of dollars.
Full press release below
NEW YORK–(BUSINESS WIRE)–Morgan Stanley and Citi today announced they have reached a definitive agreement to combine Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney, Quilter in the UK, and Smith Barney Australia into a new joint venture to be called Morgan Stanley Smith Barney. This joint venture will be the industry’s leading wealth management business. It will not include Citi Private Bank or Nikko Cordial Securities.
The joint venture combines businesses that have1:
- More than 20,000 high-quality financial advisors;
- $1.7 trillion in client assets;
- $14.9 billion in pro-forma combined revenues;
- $2.8 billion in pro-forma combined pre-tax profit;
- 6.8 million client households globally – with a strong presence in the critically important high-net-worth client segment; and,
- A footprint of more than 1,000 offices around the globe.
Under the terms of the agreement, Citi will exchange 100 per cent of its Smith Barney, Smith Barney Australia and Quilter units for a 49 per cent stake in the joint venture and an upfront cash payment of $2.7 billion. Morgan Stanley will exchange 100 per cent of its Global Wealth Management business for a 51 per cent stake in the joint venture. After year three, Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi will continue to own a significant stake in the joint venture at least through year five.
1 Morgan Stanley revenues and pre-tax income for FY08. Citi revenues and pre-tax income estimated LTM 3Q08. Client assets for Morgan Stanley and Citi as of 3Q08 for comparability purposes; Morgan Stanley 4Q08 assets were $546 billion. Clients as of 12/08. Financial advisors current.
Morgan Stanley and Citi each will distribute their products through what will be the leading global wealth management platform. Each organisation will retain its deposits as of the close of the transaction. New deposits collected in the joint venture will be allocated based on ownership of the new company.
The transaction, which has been approved by the Boards of Directors of both companies, is expected to close in the third quarter, subject to regulatory approvals and other customary closing conditions.
John Mack, Chairman and CEO of Morgan Stanley, said, “By bringing together Morgan Stanley’s and Citi’s strong wealth management businesses, we are creating a new industry-leading wealth management franchise. Morgan Stanley Smith Barney will become the first choice for clients and high-quality financial advisors by offering an even broader range of financial products and services, as well as the best market intelligence and investment opportunities from both Morgan Stanley’s and Citi’s global networks. This joint venture is an important step forward in our effort to build our wealth management franchise, which we believe will be an increasingly important and profitable part of Morgan Stanley’s business in the years ahead.”
Citi will benefit from this transaction by monetizing its investment in its wealth management business, while continuing to benefit from a multi-year earnings stream as it simplifies and streamlines its organizational structure. The joint venture expands Citi’s access to retail customers for our capital markets products and research, allowing us to better serve our issuing clients. In addition, Citi will continue to capture our current levels of order flow for our investing clients. At closing, Citi will recognise a pre-tax gain of approximately $9.5 billion, or approximately $5.8 billion on an after-tax basis, and will create approximately $6.5 billion of tangible common equity.
Citi CEO Vikram Pandit said, “This joint venture creates a peerless global wealth management business and provides tremendous value for Citi. Once this transaction is completed, our clients and Financial Advisors will benefit from the combined intellectual capital, market intelligence and product capability of Citi and Morgan Stanley. For Citi, the joint venture provides significant synergies and scale, substantially reduces our expenses and enables us to retain a significant stake in a company that immediately becomes the industry leader with real growth opportunities. We will own 49 per cent of this leading wealth management business and will continue to participate in its earnings and growth. In addition, we will generate equity capital that we can deploy to other core businesses which are well positioned to deliver attractive returns in the future. Citi and its clients will maintain access to the industry’s leading wealth management platform for capital markets transactions.”
The joint venture is expected to achieve cost savings of approximately $1.1 billion – in part by rationalizing and consolidating key functions including technology, operations, sales support, product development and marketing. These operational efficiencies represent approximately 15 per cent of the combined firm’s estimated expense base, excluding financial advisors’ commission compensation.
Experienced Management Team Drawn From Both Companies
Morgan Stanley Smith Barney will operate as one fully integrated organisation with a world-class management team drawn from both companies.
- Morgan Stanley Co-President James Gorman, who has spearheaded a significant turnaround of the Firm’s Global Wealth Management Group and previously led Merrill Lynch’s Global Private Client Group to renewed profitability, will serve as chairman of the new company. Mr. Gorman will continue to serve as Co-President of Morgan Stanley.
- Charles Johnston, who has 30 years of experience in wealth management, most recently as President of Citi’s Global Wealth Management business in the U.S. and Canada, will serve as president.
Additional senior management will be drawn from the ranks of both companies. The new venture will be governed by a newly formed Board of Directors comprised of representatives from both companies.
Will Offer Superior Platform – and Broad New Opportunities – for High-Quality Financial Advisors
This joint venture will provide a superior platform with unmatched resources, intellectual capital and research for financial advisors to grow their business. It also will provide broad new opportunities for growth and professional development to employees across the organisation, including financial advisors, branch managers, product, marketing and client service specialists, and technology and operations professionals.
Mr. Gorman said, “This transaction brings together two of the leading global brands in wealth management and some of the most talented and productive financial advisors in the industry. I truly believe this combination will offer those financial advisors the best possible platform and resources, as well as exciting new opportunities for growth and development. Both Morgan Stanley and Citi’s wealth management businesses have a culture that is focused on first-rate advice, superior client service and a true spirit of partnership, and we are committed to building upon those same values in the new Morgan Stanley Smith Barney.”
Will Offer Clients Unmatched Selection of Financial Products and Investment Opportunities from Both Morgan Stanley and Citi Networks
The scale of this venture will provide clients with access to both Morgan Stanley and Citi’s extensive global networks for the best market intelligence and investment opportunities wherever they originate around the world, while continuing to enjoy the first-rate client service that has long characterised both wealth management organisations.
Mr. Johnston said, “This new business will offer clients unrivalled wealth management services by bringing together two industry leaders and giving clients the ability to access the best of both organisations’ products, investment expertise and global reach. At the same time, it will allow clients to continue working with the trusted financial advisors who understand their needs and their goals and remain committed to a superior level of customer service.”
Morgan Stanley was advised by its Institutional Securities Group and Wachtell Lipton Rosen & Katz. Citi was advised by its Institutional Clients Group and Davis Polk & Wardwell.