Citi, Morgan Stanley Agree To Form Joint Venture; Reps Will Receive Retention Bonus—Gorman Says: “We’re Not Stupid”

It’s official: Morgan Stanley will pay $2.7 billion to acquire a 51 percent stake in Smith Barney, Morgan Stanley and Citigroup management told Registered Rep. this afternoon. The agreement was signed today. The deal will close in about six months, says Morgan Stanley Co-President James Gorman.

It’s official: Morgan Stanley will pay $2.7 billion to acquire a 51 percent stake in Smith Barney, Morgan Stanley and Citigroup management told Registered Rep. this afternoon. The agreement was signed today. The deal will close in about six months, says Morgan Stanley Co-President James Gorman.

The details of the deal were announced in a conference call on Tuesday. According to Gorman, the combined retail brokerage units will become the largest financial services firm in the world and be a “force to be reckoned with.” The combined entity will have more than 20,000 FAs and an estimated $1.7 trillion in client assets. Merrill Lynch, now a unit of Bank of America, has a similar number of FAs and $1.5 trillion in assets.

Included in the deal are Morgan Stanley’s Global Wealth Management Group together with Citi’s Smith Barney, its Quilter in the UK and its Smith Barney Australia, which will form a new joint venture called Morgan Stanley Smith Barney. Citi will retain its Private Bank unit and Nikko Cordial Securities of Japan. After five years, Morgan has the option to buy the venture outright. Gorman, a former Merrill Lynch Private Client Group chief, will be chairman of the joint venture and remain co-president of Morgan. Charlie Johnston will serve as president of the new company.

Morgan will pay $2.7 billion in cash; Citi will recognize a pre-tax gain of $9.5 billion or $8.5 billion after tax, says Mike Corbat, who replaced Sallie Krawcheck as head of Citi’s Global Wealth Management. In addition, Corbat says Citi will increase its tangible common equity by $6.5 billion. Asked if Citi, having pioneered the universal banking model, is selling the crown jewel out of a desperate need of cash, Corbat and Gorman did not directly respond to the question. They called the joint venture a “win-win” situation.

As for a broker retention bonus, Gorman says: “There will be a retention package. We’re not stupid. We live in this industry every day.” How much will it be? Gorman wouldn’t say; asked if today’s New York Post article reporting a bonus pool of $2 billion to $3 billion was accurate, Gorman stated: “You can’t believe everything you read. Unless of course you wrote it.”

To read the press release, check here.
For recent stories on the deal, click here and here.

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