Banking giants Citigroup and Morgan Stanley announced plans on Tuesday to merge their worldwide brokerage operations in a deal giving ailing Citi US$2.7 billion in much-needed upfront cash.
The combined firm, to be called Morgan Stanley Smith Barney, will have US$1.7 trillion in client assets and some 20,000 brokers as the world’s biggest retail brokerage, the companies said.
The deal was announced amid growing concerns about the fate of Citigroup, which had been the world’s biggest financial company but has been hammered by heavy losses in the financial crisis and received the largest portion of a US government program to inject capital into troubled banks.
“Why did the deal happen? Citigroup needed the money. It is not more complex than that,” said Douglas McIntyre of the financial Web site 24/7 Wall Street.
Citi will get an upfront cash payment of US$2.7 billion and will recognize a pre-tax gain of US$9.5 billion, or US$5.8 billion after taxes.
It will add US$6.5 billion of equity to help shore up the troubled balance sheet at Citigroup, seen as desperate for fresh capital.
The deal would combine Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney, Quilter in Britain and Smith Barney Australia, and would be “the industry’s leading wealth management business,” a joint statement said. It will not include Citi’s Private Bank or Nikko Cordial Securities.
Morgan Stanley will own 51 percent of the venture and Citi the other 49 percent.
The new venture would have an estimated US$14.9 billion in revenues and a combined pre-tax profit of US$2.8 billion.
It would have some 1,000 offices around the world and 6.8 million client households globally “with a strong presence in the critically important high net-worth client segment,” the statement said.
News of the deal circulating since late Friday had sparked fears that Citi, which has received a total of US$45 billion in capital injections from the US Treasury to shore up its finances, was in deeper troubled than expected.
One analyst called Smith Barney the “crown jewel” of Citi, which has been hammered by losses stemming from the US real estate meltdown.
The statement said the deal had been approved by the board of both companies and is expected to close in the third quarter, subject to regulatory approvals.
The joint venture is expected to achieve cost savings of some US$1.1 billion, it said.
“By bringing together Morgan Stanley’s and Citi’s strong wealth management businesses, we are creating a new industry-leading wealth management franchise,” Morgan Stanley chairman and chief executive John Mack said.
“This joint venture is an important step forward in our effort to build our wealth management franchise, which we believe will be an increasingly important and profitable part of Morgan Stanley’s business in the years ahead,” Mack said.
“This joint venture creates a peerless global wealth management business and provides tremendous value for Citi,” Citi CEO Vikram Pandit said.
The deal “will generate equity capital that we can deploy to other core businesses, which are well positioned to deliver attractive returns in the future,” he added.
Under the terms of the deal, Morgan Stanley and Citi will have various purchase and sale rights for the venture, but Citi “will continue to own a significant stake in the joint venture at least through year five.”
Any tie-up would likely require the blessing of the US government, which owns some 8 percent of Citi under the terms of the capital injection program.
The Wall Street Journal reported that the move was the first step in a major reorganization of Citigroup that would dismantle what had been a diversified conglomerate to focus on retail banking and services for businesses.
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