Citigroup (C) and Morgan Stanley (MS) Strike Deal Over Morgan Stanley Smith Barney

In a wind-down of one of the legacies of the 2008-2009 financial crisis, Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C) announced that they had reached agreement for Morgan Stanley to purchase Citi’s 49% stake in Morgan Stanley Smith Barney Holdings LLC (MSSB) by June 2015. As a first step, Morgan Stanley will purchase 14% of MSSB from Citi. The other 35% will be purchased within the next three years at an implied MSSB valuation of $13.5 billion.

During the recent financial crisis, Citi incurred large losses and had to be rescued by the U.S. government. Citi at this time decided to sell or close non core businesses to raise money. As part of this they sold 51% of their Smith Barney unit to Morgan Stanley which, when merged into Morgan Stanley, created the largest wealth management business in the world. The plan from the beginning was for Morgan Stanley to purchase Citi’s remaining 49% ownership, but until this deal there was never a valuation or timeline.

This agreement is generally being reported as a win for Morgan Stanley and a loss for Citi, but as Vikram Pandit, Chief Executive Officer of Citigroup was quoted as saying in Citigroup’s press release: “I am pleased we have reached agreement on a value for our remaining stake in Morgan Stanley Smith Barney. Establishing certainty regarding the divestiture of this business is in the best interests of our shareholders. As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp. Since forming Citi Holdings, we have reduced its assets by over $600 billion, and we will continue to do so in an economically rational manner.”

Sometimes you just have to move on.

Both Morgan Stanley and Citigroup, which will reportedly take a $2.9 billion accounting charge on the deal, saw their share prices jump sharply on a day when the Dow Jones Industrial average and S&P 500 were basically flat.

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