Morgan Stanley and Citi say they have finished the initial work on their Morgan Stanley Smith Barney joint venture, which had been targeted to close in the third quarter of 2009.
The deal combines Morgan Stanley's Global Wealth Management Group with Citi's Smith Barney, bringing together some 18,500 advisors worldwide.
"Morgan Stanley Smith Barney's 18,500 financial advisors are some of the most talented and productive in the industry and include eight of the top 10 advisors ranked by Barron's magazine," explains James Gorman, Morgan Stanley co-president and chairman of Morgan Stanley Smith Barney. "Given the combined resources and global platform at our disposal, we believe Morgan Stanley Smith Barney will become the employer of choice for other leading financial advisors around the world."
Citi estimates it will recognize a pre-tax gain of some $10.9 billion, or roughly $6.6 billion on an after-tax basis through the partnership, create close to about $7.8 billion of tangible common equity, and increase Citi's Tier 1 capital ratio by roughly 86 basis points on a pro forma basis as of March 31, 2009.
"Now, more than ever, investors need advisors they can trust, and the entire team at Morgan Stanley Smith Barney is ready to help our clients navigate these challenging markets," says Charles Johnston, president of Morgan Stanley Smith Barney. "We are reinventing the wealth management firm to deliver the best advice, superior service and the most innovative financial solutions to every client. Looking ahead from my 20 years at Smith Barney, I'm confident that Morgan Stanley Smith Barney will set the new industry standard for success."
As part of the deal, Citi is transferring 100 percent of its Smith Barney units for a 49 percent stake in the joint venture and an upfront cash payment of $2.75 billion. Morgan Stanley is transferring 100 percent of its global wealth management business for a 51 percent stake in the joint venture. After year three, Morgan Stanley has the right to increase its stake in the joint venture, although Citi will continue to own a significant stake through at least year five, the companies say.
"Citi benefits from this transaction by monetizing its investment in its wealth management business, while continuing to benefit from a multi-year earnings stream created by the larger firm," explains Citi CEO Vikram Pandit.
The joint venture could save its participants $1.1 billion after full integration, which will take about two years. This would represent about 15 percent of the combined firm's estimated expense base, excluding financial advisors' commission compensation, according to a statement.
To encourage certain Citigroup employees to join the venture, Citi says it will fund and Morgan Stanley will make equity grants to such employees to replace the value of certain equity awards they will forfeit in connection with the deal's closing. These awards may be made in the form of stock appreciation rights, stock options, restricted stock and restricted stock units and other forms of stock-based awards.
Up to 5 million shares of Morgan Stanley's common stock may be granted under the equity plan (subject to adjustment for certain transactions and changes in corporate structure) to a maximum of 15,000 transferred Citigroup employees.
Other Developments
Morgan Stanley Smith Barney has formed Graystone Consulting to provide high-level investment consulting advice to institutional investors and the upper-tier private wealth market.
"Graystone is a distinct business that enables accomplished investment consulting teams to draw upon Morgan Stanley Smith Barney's asset allocation and investment manager research and analytics." The teams also have access to performance reporting, custody services and other institutional-quality capabilities," says Patrick Schussman, director of Graystone Consulting.
And Morgan Stanley has expanded its prime brokerage services to include new custodial services for long securities. The services will be provided directly by Morgan Stanley Trust National Association, and the move is intended to offer asset protection to hedge fund managers and high-net-worth investors.
