From the October 2012 issue of Research Magazine • Subscribe!

Morgan Stanley, Citi Strike Deal on MSSB

Morgan Stanley and Citigroup have agreed on the valuation to be used in pricing Morgan Stanley’s purchase of the remaining stake in the Morgan Stanley Smith Barney joint venture: $13.5 billion for the full business, which includes close to 17,000 advisors.

Morgan Stanley had been trying to price a 14% stake—to add to its 51% interest in the joint venture—over the past few months. As part of the latest deal, which was announced on Sept. 11, it can buy the remaining 35% stake at this valuation through June 1, 2015, pending regulatory approval.

“This mutually beneficial agreement gives both parties certainty and transparency on price and timing, and is a significant milestone for  Morgan Stanley in the implementation of our strategy,” said Morgan Stanley Chairman and CEO James Gorman, in a press release.

In recent months, Morgan Stanley and Citigroup had disputed the value of the Morgan Stanley Smith Barney joint venture. Citigroup said the full value of MSSB was $22 billion, while Morgan Stanley says it was worth only $9 billion (though its SEC filings put the value closer to $12 billion). Both banks worked with Perella Weinberg Partners on an appraisal.

“This is a win for Morgan Stanley and a loss for Citi,” said Chip Roame, head of the consulting group Tiburon Strategic Advisors in an interview. “The price is more aligned with what Morgan Stanley has said, and Citi will take a loss.”

Still, Citi management spoke positively about the deal. “I am pleased we have reached agreement on a value for our remaining stake in Morgan Stanley Smith Barney,” Citigroup CEO Vikram Pandit said in a statement. 

“Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders,” Pandit continued. “As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp. Since forming Citi Holdings, we have reduced its assets by over $600 billion, and we will continue to do so in an economically rational manner.”

Morgan Stanley had a 50% drop in second-quarter profits, which totaled $563 million in the second quarter compared with profits of $1.19 billion a year ago. The number of MSSB advisors dropped 2% from last quarter and 6% from last year to 16,934.

“I think this [joint-venture valuation] might suggest the old wirehouse brokerage model is not worth as much as some believe it is and that profit margins will be lower” going forward,” Roame shared. “I saw that there is a chronological step purchase plan and would assume that Morgan Stanley will follow through with the acquisition as soon as their cash flows allow such and likely before the drop dead date.”

The company also has been implementing a series of restructuring steps, while picking up some advisors from rivals. A recent recruiting effort netted nine advisors from UBS, Merrill Lynch, Wells Fargo and LPL Financial with about $1.2 billion in combined assets and more than $8.3 million in yearly fees and commissions.

Still, Morgan Stanley has continued to see a number of top advisors and teams depart, though it has been moving to address issues in its merged information-technology systems—including some new steps introduced to advisors in early September designed to improve the functionality of its new trading platform.

“I think this [joint-venture purchase plan] is a good move for Morgan Stanley,” Roame stressed. “I assume that they will make some strategic moves and reposition their FA force in one or more revolutionary ways after the close.”

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