In 2009, Morgan Stanley bought a controlling stake in the joint venture, which has more than 17,000 advisers and US$1.65 trillion in client assets. Three years after the joint venture was established, Morgan Stanley, which owns 51% of the entity, is approaching the point at which it can exercise an option to buy an additional 14%.
Morgan Stanley would have the option to outright buy Smith Barney over the next two years.
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It is thought both sides are interested in doing a deal for Citigroup’s entire 49% stake this year instead of waiting for two more years, and have started behind-the-scenes posturing to negotiate.
Reaching an agreement is important for both firms. Morgan Stanley needs the brokerage business so that it can minimize relying solely on its volatile investment banking and trading businesses. Citi wants to turn its focus more towards commercial and investment banking, and investment advice doesn’t fit with that strategy.
Since 2008, Citi has divested itself of US$289 billion of unwanted businesses and other assets. The US Federal Reserve this month denied Citigroup’s request to raise dividends after the bank failed its stress test. Citigroup is submitting a revised plan, which would either require a more modest dividend request or more capital. Selling its entire stake in Morgan Stanley Smith Barney would give it more flexibility to pay higher dividends and further increase its cash reserves which it has not been serious on in the last couple of years.
Morgan Stanley on the other hand has already passed the stress test and has good cash reserve levels. So it makes sense for them to fully control Smith Barney and use that as a platform of growth for wealth management.
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By GlobalDataHowever, WealthInsight believes that Citi is in a slightly stronger negotiating position, as the deal is vital for Morgan Stanley’s future, but for Citi just another option to divest and tank up its reserves.
Both sides have an incentive to work out the price. If they cannot, they will have to take the issue to an arbitrator, an outcome that neither party wants because the decision would be binding and unpredictable.
