(Updated with more details, Pandit quote in the sixth paragraph, updates stock quotes in the final paragraph.)
DOW JONES NEWSWIRES Citigroup Inc. (C) and Morgan Stanley (MS) confirmed late Tuesday they will combine Citi's Smith Barney retail brokerage and Morgan Stanley's wealth-management operations in a joint venture.
Morgan Stanley will pay Citi $2.7 billion for Smith Barney, Smith Barney Australia and Quilter in the U.K. and take a 51% stake in the combined brokerage, the companies said after stock markets closed Tuesday.
The combination of Smith Barney's roughly 11,000 brokers and Morgan's 8,000 would create the largest broker in the world. To be called Morgan Stanley Smith Barney, the joint venture won't include Citi Private Bank or Nikko Cordial Securities. The deal is expected to close in the third quarter.
Morgan Stanley Co-President James Gorman will serve as chairman of the new company while continuing in his role Morgan Stanley. Charles Johnston, most recently president of Citi's Global Wealth Management business in the U.S. and Canada, will serve as president.
When the deal closes, Citi will recognize a $5.8 billion gain and will create about $6.5 billion of tangible common equity.
"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," said Chief Executive Vikram Pandit.
The joint venture is expected to save about $1.1 billion, in part by consolidating such functions as technology, operations, sales support, product development and marketing.
After the third year of the joint venture, Morgan Stanley and Citi will have various purchase and sale rights, but Citi will continue to own a significant stake in the joint venture at least through the fifth year.
Citi also is preparing to unveil a major reorganization that will mark a further step toward dismantling the financial conglomerate, according to people familiar with the matter.
They said the company is preparing to narrow its overall mission to two areas: wholesale banking for large corporate clients and retail banking for customers in selected markets around the world.
The planned moves essentially untangle large pieces of the financial supermarket created when Citicorp and Travelers Group merged in 1998 to form Citigroup. The shakeup is intended to slice about a third of the assets from Citigroup's balance sheet, now roughly $2 trillion in size, according to a person familiar with the company's plans.
The strategic shift is expected to be announced when Citigroup reports fourth-quarter results Jan. 22. A Citigroup spokeswoman declined to comment earlier Tuesday.
The joint venture marks a strategic shift for both companies - moving Citigroup toward a smaller, more focused business model, while Morgan Stanley will grow beyond its institutional roots to become a major player in the retail investment market.
The recently married Merrill Lynch & Co. and Bank of America Corp. (BAC) currently has the title of world's largest brokerage, with about 18,000 brokers.
As Citigroup directors and executives seek to stabilize the company, they haven't ruled out additional changes to the company's structure or operations, people familiar with the situation said. Other businesses likely to be shed include Citigroup's consumer-finance operation, such as Primerica Financial Services and CitiFinancial, private-label credit cards and many of Citigroup's consumer-related businesses in Japan. Citigroup also plans to substantially trim its proprietary-trading activity, which had been consuming significant amounts of scarce capital.
Pandit assured brokers in November that he had no intention of selling Smith Barney as the company went into financial crisis mode, seeing its stock plunge 66% in one week. But brokers knew it was a possibility.
Citigroup's shares fell 0.3% to $5.88 in after-hours trading from the Tuesday close of $5.09, and Morgan Stanley's fell 0.8% to $18.71 from the close of $18.86.
-By Kerry E. Grace and Kathy Shwiff, Dow Jones Newswires; 201-938-5975; Kathy.Shwiff@dowjones.com
(David Enrich contributed to this report.)
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Publié le 13 janvier 2009 Copyright © 2009 Dowjones