Citigroup Inc. and Morgan Stanley 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 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 and 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.
The joint venture is expected to save about $1.1 billion by consolidating such functions including 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 Tuesday.
Although the deal with Morgan Stanley likely will improve Citi's capital ratios, some observers fear the boost would not solve Citi's capital issues. The company is in need of capital amid steep losses. The deal will give Morgan Stanley eventual benefits from a larger presence in the retail brokerage business.
The deal 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. currently holds the title of the 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.
Chief Executive Vikram 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 2.2% to $5.78 in after-hours trading from the Tuesday close of $5.09, and Morgan Stanley's rose 0.7% to $19 from the close of $18.86.