Morgan Stanley Smith Barney JV Formed Amid Citi Breakup Reports

Matthew Smith

14 January 2009

The joint venture between Morgan Stanley and Citi to create Morgan Stanley Smith Barney has been formalised with Charles Johnston, president of Citi Group’s wealth management business, and James Gorman, Morgan Stanley’s co-president, named president and chairman respectively.

The combined brokerage will include Morgan Stanley's wealth management business and Citigroup's Smith Barney, Smith Barney Australia and its UK unit Quilter. It will not include Citi Private Bank or Nikko Cordial Securities.

Mr Gorman discussed details of the joint venture with the media during a conference call on Tuesday evening.

No details were disclosed during the call relating to retention packages for advisors, or the cost cutting that will result from the consolidation of the two businesses.

The firms said the venture would generate about $1.1 billion in cost savings coming from consolidation of technology, operations, sales support, product development and marketing.

During the call Mr Gorman said “It's way too early” to talk about potential layoffs resulting from the consolidation.

The combined business will boast more than 20,000 brokers and $1.7 trillion in client assets, the firms confirmed.

Morgan Stanley will pay Citigroup $2.7 billion in cash for an initial 51 per cent stake in the venture that could increase to 65 per cent after three years, 80 per cent after four years, and 100 per cent after five years.

The rest of the management team will be filled in “as we go forward,” Mr Gorman told reporters.

The deal appears to be part of a wider move by Citigroup which the Financial Times says is to break itself up by separating higher risk US consumer finance and securities businesses from its global commercial banking operations in an attempt to ensure its survival.

The FT says that people close to the situation have told it that Citi would place unwanted assets and businesses worth more than $600 billion - a third of its balance sheet - into a "non-core" unit to isolate them from healthier parts of the company.

Citigroup's private bank, as well as the US branch network and its payments business are likely to be included amongst core units, according to the report.