Morgan Stanley may pay Citigroup Inc as much as US$3 billion for control of a venture that would combine their brokerage units and overtake Bank of America Corp as the largest financial adviser to individuals, a person with knowledge of the discussions said.
Morgan Stanley, led by chief executive officer John Mack, may get 51 percent of the new company and an option to acquire the rest over three to five years, said the person, declining to be identified because the deal isn’t complete and the talks are confidential. The transaction may be announced as soon as tomorrow, the person said.
Citigroup, which reported US$20 billion of losses in the past four quarters, would get cash for its Smith Barney brokerage, while Morgan Stanley would get recurring fee revenue and more potential banking customers. The joint venture would employ about 22,000 advisers, compared with the approximately 20,000 at Bank of America after its purchase of Merrill Lynch & Co Morgan Stanley co-president James Gorman, 50, may oversee the company, tentatively named Morgan Stanley Smith Barney, the person said.
“There’s been a lot of pressure for Citi to monetize some of their more valuable assets and Smith Barney is certainly one,” said Michael Nix, a money manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. “There’s also been a lot of pressure for Morgan Stanley to look at how they can better lever their business units.”
Spokespeople for Morgan Stanley and Citigroup declined to comment. Both firms are based in New York.
The worst financial crisis since the 1930s has recast rivals in the financial industry as merger partners and transformed the US government into one of the biggest investors in Wall Street firms, including Morgan Stanley and Citigroup.
Morgan Stanley converted from a securities firm to a bank holding company and Citigroup, led by chief executive officer Vikram Pandit, took US$45 billion of US bailout money.
Under the deal being negotiated now, Morgan Stanley and Citigroup would contribute their brokerage units to the joint venture, two people with knowledge of the talks said.
Morgan Stanley would also pay Citigroup US$2 billion to US$3 billion, or 20 percent of the total value of Smith Barney, to gain majority control, one of the people said.
The venture may be led by Morgan Stanley managers and a board with a majority of Morgan Stanley appointees, the person said.
Directors have discussed replacing Win Bischoff, Citigroup’s chairman, the Wall Street Journal reported today, citing unidentified people familiar with the talks.
The US government’s taxpayer-funded cash injections into the nation’s biggest banks may cause regulators to pressure some firms to break up or restrict activities that could threaten the financial system’s stability, analysts say.
Morgan Stanley, the second-biggest US securities firm before converting to a bank in September, would draw on its existing cash to pay for the brokerage merger and wouldn’t raise new money for the deal, a person familiar with the matter said.
Some analysts and investors have called for the company to be broken up, saying that Citigroup is too large to manage.
“Morgan Stanley has been much more efficiently run because it really wasn’t a combination of so many different things,” said Richard Lipstein, a managing director at Boyden Executive Search in New York, which specializes in financial services. “Smith Barney was having difficulty getting their arms around the cost cutting on the broker side.”