Morgan Stanley gets regulatory OK to wrap up the deal for Smith Barney as early as next week. Is CEO James Gorman smart or lucky?
There's no time like the present.
With interest rates on the rise and the beginnings of a potential rotation from bonds to stocks in the retail investment community, Morgan Stanley will complete the purchase of the Morgan Stanley Smith Barney joint venture from Citigroup Inc. as early as the end of next week.
“The retail investor seems to be coming back, absent the last couple of days. It may be slow, but the tide is turning,” said Brad Hintz, an analyst with Sanford C. Bernstein & Co. LLC. “James Gorman — either through skill or luck, has managed to get these two brokerages integrated just in time for the turn.”
Morgan Stanley received regulatory approval yesterday to purchase the remaining 35% of its brokerage joint venture from Citigroup Inc. The bank expects to close the deal by next Friday, it said in a statement today.
“This is a historic day for Morgan Stanley,” Mr. Gorman, Morgan Stanley's chairman and chief executive, said in the release. “It is the culmination of a multiyear effort to transform our business model into one that offers stronger shareholder returns and greater stability in volatile markets.”
The two companies agreed last year to a $4.725 billion price tag for Citigroup's remaining stake. Rather than complete the purchase over several years, Morgan Stanley has opted to buy it all now. It also is forking over another $2 billion to redeem preferred shares held by Citigroup.
“Immediately upon closing, we expect to start seeing the benefits of 100% ownership — including an expanded deposit base, unique syndication and distribution capabilities and enhanced opportunities for both our wealth management and institutional clients,” Mr. Gorman said in the statement.
The combined brokerages are significantly smaller than when the joint-venture deal was executed in early 2009. The tumultuous rollout of a new technology platform for the now just over 16,000 brokers at the company was a factor in the decision of thousands of advisers and managers to leave over the last two years.
Mr. Gorman, however, is starting to make good on his early promises of a 20% pretax profit margin for the wealth management business. It has posted 17% margins for the last two quarters and at a conference last week Mr. Gorman suggested that the margin could exceed 23% by 2015 if interest rates rise and the stock market holds up.
That's admittedly a big “if,” but there's no question Morgan Stanley has momentum. Mr. Hintz noted that the firm's high-net-worth business is not as dominant as it once was — a legacy of its acquisitions of both Dean Witter and Smith Barney, and like the other big Wall Street firms, it still needs a strategy for developing and training new advisers to replace its aging adviser force. But with the integration of Smith Barney largely complete, Mr. Hintz said they now can start focusing on those issues.
“The retail cycle is only starting to build,” said Mr. Hintz, who has a “buy” on Morgan Stanley's stock. “[Mr. Gorman] has the scale he needs to get to 20% margins with only a modest pickup in retail activity.”
Shares of Morgan Stanley are up to about $25 after starting the year around $19.
