After days of speculation, Citigroup Inc. and Morgan Stanley have unveiled plans to merge their brokerage businesses. Citigroup also will get a $2.7 billion payment from Morgan Stanley and a $5.8 billion after-tax gain that will bolster capital.
New York-based Citigroup will exchange its Smith Barney, Smith Barney Australia and Quilter units for a 49 per cent stake in the venture from Morgan Stanley. New York-based Morgan will exchange its wealth-management business for a 51 per cent stake in the joint venture. The combined firm, to be called Morgan Stanley Smith Barney, will have $1.7 trillion in client assets. It will not include Citi Private Bank or Nikko Cordial Securities.
The deal will create a brokerage that rivals the recent combination of Merrill Lynch and Bank of America. Morgan Stanley Smith Barney will employ more than 20,000 people in the business of selling stocks and other financial products to investors across the world. (See: Bank of America buys Merrill Lynch)
Citigroup is also preparing to narrow its overall mission to two areas - wholesale banking for large-corporate clients and retail banking for customers in selected markets, according to The Wall Street Journal. This is the latest step by Citigroup CEO Vikram Pandit to break up a behemoth that once had more than a trillion dollars in assets.
Soon after his appointment, Pandit had tried to salvage the bank by selling off several non-core assets. He has sold at least 21 businesses, including the German consumer and Indian processing unit CGSL with 12,000 employees. Yet he incurred $20 billion of net losses and was forced to accept $45 billion of rescue funds from the US government. Now, he's slicing off divisions of a company he described six months ago as ''a truly global universal bank.'' (See: Citigroup sells German unit to France's Credit Mutuel for $7.8 billion / See: Tata Consultancy Services to acquire Citigroup Global Services for $505 million / See: Citi gets $20 billion cash injection and support for $306 billion bad assets )
The current situation is quite a contrast to the days of glory Citigroup has enjoyed over the decades. From the initial public offering of Commercial Credit Corp., the 97-year- old consumer lender that Chairman Sanford Weill took control of in 1986, until his retirement as Citigroup's CEO in 2003, the chart shows a return of 2,699 per cent - beating the 2,588 per cent return of Warren Buffett's Berkshire Hathaway Inc.
More recently, as the credit crisis erupted, Citigroup stock has reversed course. A 47 per cent decline in 2007 and 77 per cent drop last year made it the worst performer for two years running among large US banks. From a market capitalization of $250 billion two years ago, the stock has declined to less than a fifth of that value, making Citigroup smaller than several regional players.
The brokerage industry is in turmoil as the recession has sent the stock market tumbling. As Citi's stock price cratered in November, the federal government agreed to invest $20 billion in the firm and bear losses on a chunk of Citigroup's risky assets. Still, the worldwide financial giant has faced continuing pressure to sell off assets to raise cash.
In September, Citigroup proposed acquiring Charlotte-based Wachovia Corp.'s banking assets. The Federal Deposit Insurance Corp. helped broker the $2.16 billion deal by agreeing to absorb anything above $42 billion in losses on Wachovia's $312 billion pool of loans. That deal was trumped by San Francisco-based Wells Fargo & Co. which recently bought Wachovia for $12.7 billion. See: Wells Fargo edges Citi to grab Wachovia for $15.1 billion