According to recent reports, Morgan Stanley and Citigroup have finally come to a mutual agreement in terms of the value of their joint venture brokerage. The latest valuation comes to the tune of $13.5 billion, which is a great win for Morgan Stanley after months of going back and forth.
This value is much lower than Citigroup had originally given to Morgan Stanley Smith Barney on its record books, and because of this lower valuation, Citigroup will take on $2.9 billion in non-cash charges towards their earnings within the third quarter of 2012.
This popular business venture between these two banks dates back to 2009, during a time at which the financial crisis was causing panic all over the world. Morgan Stanley Smith Barney is now the largest US-based brokerage, with assets of around $1.71 trillion.
Although Morgan Stanley, who owns the largest amount in the joint venture, was always seen as wanting to purchase Citigroup, reports were always unsure of how much they were willing to pay.
While the transaction did not turn out as well for Citigroup like they would have hoped, their capital should shoot up significantly because of Morgan Stanley owning such a large part in the joint venture. Because of this new agreement, both banks now have the ability to adjust their business plans.
Many who work on Wall Street were anxiously awaiting the news of this settlement for months, as reports say that it may help to predict how profitable the brokerage industry will be in the future. As of late, the brokerage industry has gone through periods of slow trading and marginal interest rates.
An arbitrator, Perella Weinberg Partners, was originally brought on in order to help settle the dispute over the price between the two banks. However, this recent agreement was settled by the two banks themselves, without the use of the arbitrator firm.
With these new terms, Morgan Stanley will be picking up another 14 percent of Morgan Stanley Smith Barney and will also be purchasing Citigroup’s entire 35 percent share in the venture by June 1, 2015. The companies business dispute lawyers in New York really had their hands full getting all of these documents together to keep both companies happy.
For Citigroup, this is all part of Chief Executive Vikram Pandit’s plan to get rid of failing assets that are believed to not be very beneficial for the company in the future. Also known as Citi Holdings, these depreciating assets had shrunk from 36 percent of total assets in 2008 to 10 percent in June of 2012.
Before this dispute was settled, Morgan Stanley believed in a $9 billion appraisal while Citigroup’s was much higher, to potentially show that they believe they’ll be much more profitable in the future.
Citigroup originally had a 49 percent stake, which was worth $11.9 billion but with this new deal, that number has been shrunk down to around $6.6 billion. Citigroup will now endure a $2.9 billion charge after taxes, which will be implemented in order to mirror the stake’s smaller value.
Reports say that Morgan Stanley’s main reason for purchasing a larger stake in their joint venture is to move their business away from invest banking and security trading, which have both proven to be very unstable within the past few years.
With the announcement of this deal finally going through, both Citi and Morgan Stanley had their stocks shoot up. Analysts believe that this merger will cause Morgan Stanley to accomplish much more within the next few years if the market gets better and interest rates go back up.