Smith Barney Joint Venture Signals Morgan Stanley’s Entry Into Australian Retail Big Leagues
The deal reached by Citi and Morgan Stanley over the weekend for Morgan Stanley to pay US$ 3 billion to Citgroup, forming a joint venture stock broking unit using Citi’s retail stock broking franchise Smith Barney as the basis for the business, signals the end of Citigroup’s universal banking business model and the entry of Morgan Stanley as a major retail stock broker in Australia.
The joint venture will be headed up by an Aussie former career Merrill Lynch man James Gorman, who is thought to be perhaps the senior most Australian working on Wall Street. As the deal was announced, former US Treasury Secretary and Goldman Sachs CEO Robert Rubin announced his retirement from the banking conglomerate.
The deal which contrasts sharply with Citigroup’s stated strategy of offering universal banking or a one stop shop for clients who require financial services, suggests that a break up of the bank may be in the offing, and there is some market speculation that Citi Chairman Win Bischoff may be replaced.
The Australian operations of Smith Barney are the largest outside of the United States, with over 200 financial planners and advisers in the country. Indeed the Australian unit of Smith Barney attracted a lot of interest from a number of players.
NAB was rebuffed after making a low ball bid, and last month it was speculated that Macquarie desired an increase in its retail broking presence but subsequently failed to make a bid for the unit.
Until now Morgan Stanley has been considered little more than a niche player in the Australian retail broking landscape despite its marquee status globally. The investment bank as a strategy has wanted to develop its retail broking franchise in the belief that a larger retail business would result in an increased institutional underwriting business.
Morgan Stanley’s entry into the Australian retail market was only very recent, and began with the launch of a managed equities fund. The investment bank was considered a potential suitor for Australian broker JBWere, before being beaten to the punch by perennial rival Goldman Sachs.
The End Of The Universal Bank ?
Smith Barney only constitutes a small fraction of Citi’s Australian revenue, but the loss of total control of the unit will mean a loss of some Citi capabilities. The deal means it will no longer posses the retail distribution capability associated with Smith Barney exclusively, a key selling point when its investment bankers were pitching deals.
Questions now arise over how Citi and Morgan Stanley will both utilise the retail client base of the unit if the two investment banks end up working on the same deal.
Smith Barney’s Australian sales force expressed their dissatisfaction with any potential acquisition by a domestic player, after there was speculation that the unit may be sold to an Australian buyer, which may have meant that advisers would not have been able to offer global investment products to their clients.
Citi’s Australian boss, Stephen Roberts, was briefed by senior executives yesterday on the potential ramifications for the bank locally.
The bank was part of CBA’s institutional placement to fund the BankWest purchase and carried out a bond issuance last week for the retail bank. Citi has annually been the third-largest broker behind UBS and Macquarie in terms of ASX equity trading volumes in which Morgan Stanley is currently ranked 10th.
Morgan Stanley is confident the deal will be approved and, as part of the transaction, the domestic Smith Barney business will be conducted under the Morgan Stanley brand.
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