Citigroup & Morgan Stanley Continue Building Their Brokerage
Monday, January 12, 2009PAUL KANGAS: Citigroup and Morgan Stanley appear to be inching closer to a deal to combine their brokerage units. Morgan Stanley would reportedly pay Citigroup between $2 billion and $3 billion for a 51 percent stake in a joint venture. Morgan would then have the option to buy the rest of Citi's Smith Barney division over the next three to five years. But as Erika Miller reports, analysts aren't sure it would make long-term strategic sense for Morgan Stanley or Citi.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here's a riddle: what does club soda have to do with Morgan Stanley's possible stake in Smith Barney? For the answer, ask Brad Hintz at Sanford Bernstein.
BRAD HINTZ, BROKERAGE ANALYST, SANFORD C. BERNSTEIN: I have an example of an old Morgan Stanley. At one point, they had club soda that they offered in the United Kingdom. And so the question I have to Morgan Stanley is do you know what you want to be when you grow up?
MILLER: Hintz owns Morgan shares and his firm has done business with Morgan over the past year. Like many industry experts, Hintz is not exactly sure what's motivating Morgan Stanley's apparent desire to control Smith Barney. Is it merely an opportunity that's too good to pass up? Or does Morgan want to evolve into more of a retail brokerage house? If it's the latter, Hintz believes a joint venture could prove profitable.
HINTZ: This is a great opportunity for Morgan Stanley to gain scale in retail. And the retail brokerage business, you are more profitable the larger you are and over time, everyone has tried to become Merrill Lynch. This is an opportunity for Morgan Stanley to leapfrog everybody and get to that same level as Merrill Lynch.
MILLER: Plenty of financial firms besides Citigroup are in desperate need of capital. However, S&P analyst Stuart Plesser predicts most other major banks will be able to avoid asset sales.
STUART PLESSER, BROKERAGE ANALYST, STANDARD & POOR'S: I think that you really have to look at the situation bank by bank. I think that the banks that have low capital levels at this point in the game will likely either A, need to cut their dividends further and/or raise equity capital further down the line.
MILLER: But for the most troubled companies like Citigroup, Plesser says even asset sales might not be enough to avoid government help.
PLESSER: I'm not fully convinced that the government won't have to come back in and inject more capital to the company somewhere down the road.
MILLER: If it happens, analysts say a Citigroup-Morgan Stanley deal would likely encourage more consolidation in the financial sector. That they say, would ultimately be positive for the industry by squeezing out the weakest players. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
