‘Morgan Stanley Smith Barney’ could save $320m in staff costs

Morgan Stanley and Citigroup have confirmed the formation of a wealth management joint venture and said they intend to make more than $1bn ($758m) in cost savings, including $320m in personnel expenses.

James Gorman, co-president of Morgan Stanley, will be chairman of the new company while retaining his current role. Charles Johnston, most recently president of Citigroup’s global wealth management business in the US and Canada, will be president of the combined effort to be called Morgan Stanley Smith Barney.

Johnston said: “Retention packages will be structured attractively and in line with industry practises.”

Gorman said he was confident there would not be significant attrition of financial advisors due to the retention payments. He declined comment on how many brokers will be receiving payments. The joint venture will employ more than 20,000 financial advisors.

The two banks said other cost savings will come from consolidating functions including technology, operations, sales support, product development and marketing.

Morgan Stanley Smith Barney will exclude Citi Private Bank or Nikko Cordial Securities.

Analysts questioned why Citigroup wanted to divest a stake in one of its better lower-capital intensive businesses. Johnston said: “We will own 49% of a more valuable industry leading business, which we decided was sensible and value enhancing.”

Johnston said the whole business had not been offered for sale as the bank wanted to participate in the wealth management industry and preserve earnings for three years.

Under the terms of the agreement, Citigroup will exchange 100% of Smith Barney, Quilter in the UK, and Smith Barney Australia for a 49% stake in the joint venture and an upfront payment of $2.7bn in cash.

Gorman said: “We have sufficient equity to cover the payment.”

At closing, Citigroup will recognise a pre-tax gain of approximately $9.5bn and create approximately $6.5bn of tangible common equity.

After the third anniversary, Morgan Stanley has the option to buy another 14% of the joint venture at fair market value and another 15% after four years. If Morgan Stanley owns more than 80% of the joint venture after five years, Citigroup has the option to put the rest of the stake to Morgan Stanley.

John Mack, chairman and chief executive of Morgan Stanley, 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.”

For Citigroup, the joint venture is a reversal of the bank’s stated strategy.

In November, Vikram Pandit, Citigroup’s chief executive, said in a conference call that Smith Barney would not be sold.

Glenn Schorr, an analyst at UBS, said in a report yesterday: “That a month later such a transaction is even a possibility suggests to us that this move is at least partially being driven by the ownership presence of the US government and possibly even a board that finally feels the need to do something a little more impactful.

Interestingly, there were a flurry of brow raising announcements last week—Citigroup’s about face on loan re-modification legislation, Robert Rubin stepping down, and now this.”

Morgan Stanley was advised by its institutional securities group and law firm Wachtell Lipton Rosen & Katz. Citigroup was advised by its institutional clients group with legal advice from Davis Polk & Wardwell.

Source —Write to Shanny Basar at sbasar@efinancialenews.com // http://www.wealth-bulletin.com/home/content/3353014526/ )

Richard Reid is the founder of Pinnacle Proactive, Specialising in theEmployee Assistance ProgramStress ManagementStaff Retention & Absenteeism. Take a Proactive Approach to Growing Your Organisation & its People. For more info visit http://www.pinnacleproactive.com


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