Less than a week after John Mack announced his pending Jan. 1 retirement as CEO of Morgan Stanley (NYSE:MS), his heir-apparent, James Gorman, is possibly facing a daunting decision: exercising the right to buy the remaining 49% of Smith Barney from joint venture partner Citigroup Inc. (NYSE:C) or seeking a retail banking partner replacement.
At a conference sponsored by Barclays plc (NYSE:BCS), Citigroup CEO Vikram Pandit formally acknowledged plans to unload its remaining stake in the brokerage. It was not clear whether Pandit was talking about accelerating the divestment. The original JV agreement includes clauses that allow Morgan Stanley to raise
its stake to 65% after three years, 80% after four years and 100%
after five years. While The Wall Street Journal story about Pandit's comments made it seem like a foregone conclusion that Morgan Stanley will exercise its right to the remaining stake, it may not be so simple.
Certainly Gorman's background coming from the brokerage side of the business would suggest he would salivate at the opportunity to swallow the rest of Smith Barney, perhaps sooner than later. However, Gorman recently announced his commitment to Morgan Stanley's institutional side. Maybe those words were a simple attempt to assuage any unhappy personnel who were championing the candidacy of his frienemy, co-president Walid Chammah, who came up via the M&A advisory business.
Of course such a proclamation would not necessarily stop Mack and Gorman from exercising the option should Pandit want to accelerate the divestment. However, other factors might, namely capital needs (presumably the remaining stake is worth close to the $2.75 billion paid in June) and antitrust concerns.
Another factor that might warrant a second thought on complete ownership is a strategic concern. It might behoove Morgan Stanley to keep a retail banking partner on board. Smith Barney's leading rival, the thundering herd of Merrill Lynch & Co., is now part of Bank of America Corp. (NYSE:BAC), which is integrating its retail banking and brokerage operations as a means to expand both.
If Citi is no longer committed to offering a retail outlet for Smith Barney, perhaps Morgan Stanley may want to find another retail bank to fill the void -- one that would complement without eliciting antitrust concern. And despite the trouble in the banking industry, there remain dozens of regional retail banks that could fill that void, but few offer the reach of either Citigroup or rival Bank of America. So if not Citi, then who? - Matthew Wurtzel
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