Morgan Stanley and Citi have announced the closing of their Morgan Stanley Smith Barney joint venture. Originally targeted for the third quarter of 2009, the closing was achieved ahead of schedule.
As previously announced, Morgan Stanley Smith Barney combines Morgan Stanley’s Global Wealth Management Group with Citi’s Smith Barney in the U.S., Quilter in the UK, and Smith Barney Australia retail units into a new wealth management firm with over 130 years of experience.
Leveraging the combined strengths of two leading global brands in wealth management, the new Morgan Stanley Smith Barney features:
– Over 18,500 world-class financial advisors, including 33 of the top 100 financial advisors on the Barron’s 2009 “Top Advisors” survey
– 6.8 million client households globally, with a strong presence in the high-net-worth client segment
– Approximately $14 billion in pro forma net revenues
– 1,000 brokerage locations around the world, including in the U.S., Latin America, Europe/Middle East and Asia
“Morgan Stanley Smith Barney perfectly complements Morgan Stanley’s traditional leadership position in the global institutional markets,” says John Mack, chairman and CEO of Morgan Stanley. “It is a clear industry leader that will be the premier choice for clients and high-quality financial advisors around the world, who will benefit from an unrivaled global platform, a vast array of products and services and the powerful intellectual capital that both firms bring to this venture.”
“Today’s closing marks another step in the execution of the Citi Holdings strategy. One important goal for Citi Holdings is to optimize the value to Citi shareholders through value-enhancing disposition and combination opportunities. We believe this transaction is consistent with that goal,” says Vikram Pandit, chief executive officer of Citi. “Citi benefits from this transaction by monetizing its investment in its wealth management business, while continuing to benefit from a multi-year earnings stream created by the larger firm.”
Both Morgan Stanley and Citi will access the joint venture for retail distribution and each firm’s institutional businesses will continue to execute order flow from the joint venture. At closing, Citi estimates it will recognize a pre-tax gain of approximately $10.9 billion, or approximately $6.6 billion on an after-tax basis, create close to an estimated $7.8 billion of tangible common equity and increase Citi’s Tier 1 capital ratio by approximately 86 basis points on a pro forma basis as of March 31, 2009.
Under the final terms of the agreement, Citi will transfer 100% of its Smith Barney, Smith Barney Australia and Quilter retail units for a 49% stake in the joint venture and an upfront cash payment of $2.75 billion. Morgan Stanley will transfer 100% of its Global Wealth Management business for a 51% stake in the joint venture. After year three, Morgan Stanley has the right to increase its stake in the joint venture, although Citi will continue to own a significant stake through at least year five.
The joint venture is expected to create significant value for Morgan Stanley and Citi by achieving cost savings of approximately $1.1 billion after full integration, which will take about two years. These operational efficiencies represent approximately 15% of the combined firm’s estimated expense base, excluding financial advisors’ commission compensation.
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