Citigroup Inc. and Morgan Stanley confirmed late Tuesday that they had a deal to combine Citi's Smith Barney retail brokerage and Morgan Stanley's wealth management operations in a joint venture.
Morgan Stanley would pay Citi $2.7 billion for Smith Barney, Smith Barney Australia, and Quilter and take a 51% stake in the joint venture, the companies said after the market closed.
Combining Smith Barney's roughly 11,000 brokers and Morgan Stanley's 8,000 would create the world's largest brokerage. The venture, Morgan Stanley Smith Barney, would not include Citi Private Bank or Nikko Cordial Securities.
The deal is expected to close in the third quarter.
James Gorman, a Morgan Stanley co-president, would chair the venture while maintaining in his role at Morgan Stanley.
Charles Johnston, most recently the president of Citi's global wealth management business in the United States and Canada, would serve as the venture's president.
The venture is expected to save about $1.1 billion by consolidating such functions as technology, operations, sales support, product development, and marketing.
After the third year of the venture, Morgan Stanley and Citi would have various purchase and sale rights, but Citi would continue to own a significant stake in the venture at least through its fifth year.
Citi also is preparing to unveil a major reorganization that would mark a further step toward dismantling the financial conglomerate, according to people familiar with the matter. (See related story.)
Though the deal with Morgan Stanley likely would improve Citi's capital ratios, some observers fear the boost would not solve Citi's capital issues.
The New York company is in need of capital as a result of steep losses.
The deal would give Morgan Stanley eventual benefits from a larger share of the retail brokerage business.
This is a strategic shift for both companies — moving Citi toward a smaller, more focused business model while taking Morgan Stanley beyond its institutional roots and making it a major player in the retail investment market.
Bank of America Corp., as a result of its acquisition of Merrill Lynch & Co. Inc., is currently the world's largest brokerage, with about 18,000 brokers.
Vikram Pandit, Citi's chief executive officer, had assured brokers in November that he had no intention of selling Smith Barney.
At the time his company was going into financial crisis mode — its stock plunged 66% in a single week.
Nevertheless, brokers knew that a deal such as this one was a possibility.