Charting Stocks

The Morgan Stanley Smith Barney deal is now official.  The new wealth management firm officially launched this week and has more than 20,000 financial advisors with $1.7 trillion in client assets. The firm has been formed through a joint venture between Morgan Stanley and Citigroup. Morgan paid $2.7 billion for a 51% stake in the new company with an option to buy the remaining 49% from Citigroup sometime between years 3 to 5.

$2.7 billion for 51% of Smith Barney is truly a fire sale deal. At its 2007 peak, estimates of Smith Barney’s value ranged between $20-30 billion. Let’s not forget that Ken Lewis, CEO of Bank of America, paid $50 billion for Merrill Lynch in September 2008,  a  time when a failure was imminent at Merrill.

The Smith Barney purchase may be a defining moment in Morgan Stanley CEO John Mack’s tenure. Sure, the firm will reap a heavy return on investment when the financial markets stabilize but it also fulfills a decade long ambition of many Morgan Stanley Executives – They’ve finally dumped Dean Witter, the retail brokerage arm of the firm.

The NY times described the 1997 merger of Morgan Stanley Dean Witter as follows:

“The Morgan Stanley Group, one of Wall Street’s elite investment firms, and Dean Witter, Discover & Company, which sells stocks and bonds to small investors, agreed to merge yesterday.

An elite investment firm and one that sells stocks and bonds to small investors. Would you have predicted the culture clash that followed?  The times goes on:

“The new firm faces the stiff challenge of integrating Morgan Stanley’s aristocratic culture, where managing directors routinely make millions of dollars a year for advising companies like AT&T, with the meat-and-potatoes environment at Dean Witter Reynolds, whose brokers ply their trade everywhere from suburban office complexes to small-town storefronts. In a way, the merger would be as if Sears and Saks Fifth Avenue decided to join.”

The Morgan Stanley Dean Witter deal angered many MS execs to leave the firm. Others have tried to cut ties with the retail division ever since. There were  calls for a spin-off of the division throughout the early 2000s, and now in 2009, Morgan Stanley (The investment bank) has finally separated themselves from Dean Witter.

The “Morgan Stanley” side of the Morgan Stanley Smith Barney deal is comprised of the old Dean Witter arm. The new firm is now a separate entity from Morgan Stanley. MSSB is incorporated and will operate under a separate broker/dealer. Morgan Stanley brokers don’t work for Morgan Stanley anymore (Whether they realize it or not).

What are John Mack’s plans for the new retail firm? I wouldn’t be surprised if MSSB were to be spun off in a few years. If Mack could reap a $20 billion profit while finally severing all ties to the old Dean Witter, he will be hailed as a hero by many at the investment bank.

I’d look for 2 clues in trying to figure the fate of the new firm (The first one has already happened):
1. A new broker/deal separated from Morgan Stanley (The investment bank)
2. A name change from Morgan Stanley Smith Barney to just Smith Barney. That should be the dead give away. The name will eventually change to one of the two (as most merged financial companies), but a Smith Barney name would make for a clean break.

Related posts:

1. Morgan Stanley: James Gorman to Replace John Mack as CEO
2. Financial Stocks Starting to Rollover
3. These 10 Banks Will Repay TARP