Morgan Stanley and Citi form wealth management business through the combined firm. Joint venture will be called Morgan Stanley Smith Barney, and will have more than 20,000 financial advisors and $1.7 trillion in client assets.
The combination will compose Morgan Stanley’s Global Wealth Management Group and Citi’s Smith Barney, Quilter in the UK, and Smith Barney Australia. It will not include Citi Private Bank or Nikko Cordial Securities.
The joint venture combines businesses that have:
-More than 20,000 high-quality financial advisors;
-$1.7 trillion in client assets;
-$14.9 billion in pro-forma combined revenues;
-$2.8 billion in pro-forma combined pre-tax profit;
-6.8 million client households globally – with a strong presence in the critically important high-net-worth client segment; and,
-A footprint of more than 1,000 offices around the globe.
Under the terms of the agreement, Citi will exchange 100% of its Smith Barney, Smith Barney Australia and Quilter units for a 49% stake in the joint venture and an upfront cash payment of $2.7 billion. Morgan Stanley will exchange 100% of its Global Wealth Management business for a 51% stake in the joint venture.
After year three, Morgan Stanley and Citi will have various purchase and sale rights for the joint venture, but Citi will continue to own a significant stake in the joint venture at least through year five.
Morgan Stanley and Citi each will distribute their products through what will be the global wealth management platform. Each organization will retain its deposits as of the close of the transaction. New deposits collected in the joint venture will be allocated based on ownership of the new company.
The transaction, which has been approved by the Boards of Directors of both companies, is expected to close in the third quarter, subject to regulatory approvals and other customary closing conditions.
Citi will benefit from this transaction by monetizing its investment in its wealth management business, while continuing to benefit from a multi-year earnings stream as it simplifies and streamlines its organizational structure. The joint venture expands Citi’s access to retail customers for our capital markets products and research, allowing us to better serve our issuing clients.
In addition, Citi will continue to capture our current levels of order flow for our investing clients. At closing, Citi will recognize a pre-tax gain of approximately $9.5 billion, or approximately $5.8 billion on an after-tax basis, and will create approximately $6.5 billion of tangible common equity.
The joint venture is expected to achieve cost savings of approximately $1.1 billion – in part by rationalizing and consolidating key functions including technology, operations, sales support, product development and marketing. These operational efficiencies represent approximately 15% of the combined firm’s estimated expense base, excluding financial advisors’ commission compensation.
This joint venture will provide a comprehensive platform with resources, intellectual capital and research for financial advisors to grow their business. The scale of this venture will provide clients with access to both Morgan Stanley and Citi’s extensive global networks for the market intelligence and investment opportunities wherever they originate around the world.
The combined firm will be governed by management team drawn from both companies. The Board of Directors comprised of representatives from both companies will also be formed.
Morgan Stanley Smith Barney will operate as one fully integrated organization with a world-class management team drawn from both companies.
Morgan Stanley Co-President James Gorman, who has spearheaded a significant turnaround of the Firm’s Global Wealth Management Group and previously led Merrill Lynch’s Global Private Client Group, will serve as chairman of the new company. Gorman will continue to serve as Co-President of Morgan Stanley.
Charles Johnston, who has 30 years of experience in wealth management, most recently as President of Citi’s Global Wealth Management business in the U.S. and Canada, will serve as president.
“By bringing together Morgan Stanley’s and Citi’s strong wealth management businesses, we are creating a new industry-leading wealth management franchise,” says John Mack, chairman and CEO, Morgan Stanley.
“Morgan Stanley Smith Barney will become the first choice for clients and high-quality financial advisors by offering an even broader range of financial products and services, as well as the best market intelligence and investment opportunities from both Morgan Stanley’s and Citi’s global networks. 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.”
“This joint venture creates a peerless global wealth management business and provides tremendous value for Citi,” says Vikram Pandit, CEO, Citi. “Once this transaction is completed, our clients and Financial Advisors will benefit from the combined intellectual capital, market intelligence and product capability of Citi and Morgan Stanley.”
“For Citi, the joint venture provides significant synergies and scale, substantially reduces our expenses and enables us to retain a significant stake in a company that immediately becomes the industry leader with real growth opportunities.”
“We will own 49% of this leading wealth management business and will continue to participate in its earnings and growth. In addition, we will generate equity capital that we can deploy to other core businesses which are well positioned to deliver attractive returns in the future. Citi and its clients will maintain access to the industry’s leading wealth management platform for capital markets transactions.”
L.D.