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Morgan Stanley Smith Barney: Venture Completes Its First Steps

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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.

Morgan Stanley Private Wealth Management, a division of Morgan Stanley Smith Barney, recently hired a team of six to serve ultra-high-net-worth and institutional clients in Florida and Latin America. The team will be based in Miami and includes two investment representatives: Candido Viyella and Luis Arriola. The team will report to Jon Mallon, executive director and manager of the private wealth management office in Miami.

“We are pleased that this very successful team with a long track record in the industry has decided to join Morgan Stanley Private Wealth Management,” shares Mallon. “Morgan Stanley Private Wealth Management is committed to further developing our coverage in Florida and the Latin American Markets, and this team will be critical to our efforts.”

Viyella and Arriola both join Morgan Stanley from UBS, where each spent nine years.

In terms of improving client relationships within other market segments, the Morgan Stanley joint venture says its wealth management office in Beverly Hills has invited several professionals in estate planning and legal relationship recognition to discuss wealth planning for same-sex couples.

The planned event features a discussion on the importance of both finance and estate planning for such couples and how to prepare for events like retirement and wealth transfer. The presentation also aims to address the differences in relationship recognition such as domestic partnerships and civil unions, and some of the questions left unanswered by recent court decisions in California.

As for other recent hires, Morgan Stanley placed Wayne Chrebet, National Football League (NFL) veteran and former wide receiver with the New York Jets, at its global wealth management office in Red Bank, N.J., as a financial advisor. Chrebet joins the Moldaver Group, one of Morgan Stanley’s leading wealth management teams, led by Senior Vice President Ed Moldaver. The team consists of six investment professionals.

“We are extremely pleased that Wayne has joined Morgan Stanley,” says Christopher Shaw, Red Bank, N.J., complex manager. “Wayne is well known and respected in our local community and throughout the NFL, and is a valued addition to our team.”

Prior to joining Morgan Stanley, Chrebet played in the NFL for 11 seasons (1995-2005) exclusively for the Jets. In 1995, as a walk-on, he earned a spot with the New York Jets as a wide receiver. During his tenure with the Jets, he set the NFL record for the most receptions by a wide receiver in his first two seasons.

In 2004, Sports Illustrated dubbed Chrebet’s career history as “one of the greatest rags to riches stories in the history of professional sports.” One of his nicknames is “Mr. Third Down.” (His career record includes 580 receptions, about 7,400 receiving yards and 41 touchdowns. His jersey number with the Jets, now retired, is 80).

Chrebet is actively involved with the Colleen Gibson Foundation, United Way and the Make-A-Wish Foundation. In addition, both Chrebet and Moldaver are active within the Alliance of the Guardian Angels, an organization that helps low-income neighborhoods deal with bullying and gang activity.

Morgan Stanley says it recently paid back $10 billion to the U.S. Treasury as part of the toxic asset relief program (TARP). “Morgan Stanley and its employees appreciate the support of the U.S. government, Congress and the Administration during this challenging period,” the company explains.

Janet Levaux, MBA/MA, is the editor of and managing editor of Research magazine; reach her at [email protected].


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