Citi and Morgan Stanley to merge brokerages
In the first step of an expected overhaul of Citigroup by its Indian American chief executive Vikram Pandit, the bruised bank has agreed to sell 51 per cent of its brokerage division to Morgan Stanley.business Updated: Jan 14, 2009 11:39 IST
In the first step of an expected overhaul of Citigroup by its Indian American chief executive Vikram Pandit, the bruised bank has agreed to sell 51 per cent of its brokerage division to Morgan Stanley.
Citigroup confirmed speculation on Tuesday that it plans to merge its brokerage Smith Barney with that of Morgan Stanley, which will pay $2.7 billion for a 51 per cent stake in the joint venture.
In a statement released by both companies, Morgan Stanley said it reserves the right to raise its stake in the joint venture over the next three to five years, before ultimately assuming control after five years.
The combined entity, which would be called Morgan Stanley Smith Barney, would be one of the America's largest brokerages, with more than 20,000 financial advisers and $1.7 trillion in client assets.
"We are creating a new industry-leading wealth management franchise," said John Mack, Morgan Stanley's chairman and CEO, in a statement.
While the deal is expected to save the two firms a combined $1.1 billion, both appear poised to gain from the joint venture, CNN said.
Morgan Stanley would position itself to build its wealth management business, while Citigroup would generate some quick cash, while still maintaining a sizeable stake in the reliable Smith Barney unit.
In a conference call following the announcement, Morgan Stanley co-president James Gorman, who will serve as chairman of the joint venture, and Mike Corbat, CEO of Citi's global wealth management division, said it was too early to tell how many jobs could be lost as a result of the tie-up.
Tuesday's action, however, represents what some consider to be the first step by Citigroup to dismantle its so-called "universal banking" business model, offering all types of financial products to consumers and businesses, CNN said.
It cited a source close to the matter as indicating that the company will unveil a reorganisation plan in the coming weeks.
The Wall Street Journal reported that the company could time the announcement to coincide with its fourth-quarter results Jan 22. A company spokesman declined to comment on the matter.
Citigroup observers have speculated that any number of its different units could be shed as part of a restructuring plan, including international operations such as Banamex, one of Mexico's largest commercial banks.
Others have speculated that Citigroup might pursue a bolder approach by trying to sell other divisions, including its massive credit card unit.
Some analysts previously suggested that the company's transaction services business, which helps finance trade for large corporations, might also be on the block. However, a source close to the matter cited by CNN said that the company has no plans to sell that business.
A breakup of Citigroup, however, would represent a major departure from the company's so-called "universal bank" business model, which has been in place for more than a decade following the merger between Citicorp and insurance company Travellers in 1998.
Pandit had maintained his commitment to the company's position as a one-stop financial shop for businesses and individuals as recently as last autumn. But the New York City-based bank has come under increasing pressure to take drastic action in recent weeks.
Citigroup shares gained more than five per cent on Tuesday on the New York Stock Exchange following a 17 per cent stock plunge just a day earlier. Morgan Stanley shares edged slightly higher.