This article was updated March 5, 2009, to include official comments from Citi and Morgan Stanley executives.
As Morgan Stanley and Citi plan the largest-ever retail brokerage merger, combining Morgan Stanley’s Dean Witter unit with Citi’s Smith Barney unit to form a new entity in a deal that will close in the third quarter, the path ahead holds challenges but also opportunity for the two organizations.
The times could hardly be tougher for these two firms or for the industry as a whole. In early March the U.S. government announced that it would triple its stake in the struggling Citigroup to 36 percent, and Citi’s stock was trading at around $1.20 per share, while a year ago it traded at approximately $22. Morgan Stanley stock was trading at $18 in early March versus $42 a year earlier.
But in their first interviews on the merger, Citi and Morgan executives expressed optimism and confidence that their joint venture, to be called Morgan Stanley Smith Barney, would lead the industry not only in sheer size but also in technology use and efficiency. “We have the opportunity to create the strongest wealth management firm in the industry by bringing together two of the best brands in terms of product platforms and technology platforms,” says Kunal Kamlani, COO of Smith Barney. “We’re doing this with an eye toward what’s ultimately best for the financial adviser and the client. When you can run a 20,000-adviser, $15 billion-revenue business on a single platform instead of two, you automatically drain cost out of the system.”
As for the challenges, Anne Morris, managing director of Linedata, sums them up in one word: disruption. “All the plans you put in place — strategic plans, goal setting — get disrupted in these kinds of mergers,” she says. “It might seem like a subtle thing, but it has a big impact for those two firms as well as firms like Bank of America and Merrill Lynch.”
Hurdles for the Morgan/Citi deal include demoralizing layoffs and cost cuts, tricky platform integrations, breakaway brokers, and customer defections. But on the upside, the two organizations have the chance to build a stat-of-the-art platform for financial advisors and their clients.
Where Will the $1.1 Billion Come From?
Prominent in the merger announcement was the promise to make $1.1 billion worth of cost cuts, “in part by rationalizing and consolidating key functions including technology, operations, sales support, product development and marketing,” according to a release. Note that technology is first on this list.
Considering that, premerger, the IT budget for Morgan Stanley’s retail unit was around $500 million (according to an insider), the $1.1 billion goal is very aggressive. But people interviewed for this story say the figure is realistic. “The tendency is to under-promise and over-deliver,” says a vendor executive who works with both firms and spoke on the condition of anonymity. “So I would suspect that they feel comfortable being able to hit those targets.”
Most observers say that head count reductions are the most likely source of cost savings. In fact, because of all the layoffs expected, some have called the new joint venture “Citi Morgue.”
“I don’t think there’s anybody in either technology organization at Smith Barney or the retail side at Morgan Stanley that’s really feeling comfortable,” comments a former executive in Morgan Stanley’s global wealth management technology group who preferred not to be identified. “If the market and environment weren’t bad enough, who knows what’s going to happen with this consolidation?”
For instance, according to a Citi executive who spoke off the record, Smith Barney doesn’t have an end-to-end automated account opening process; automating that process could result in slashing as many as 100 jobs. Further, he says, both firms have bloated middle offices.
Citi and Morgan executives, however, firmly deny that the bulk of the cost savings will come from layoffs. “While we have a $1.1 billion synergy target out there, we’re not doing this with a focus on getting maximum cost out of the system,” Smith Barney’s Kamlani says. “The focus is on building a wealth management platform for our clients and our financial advisers, knowing that this is a scalable business model and that the costs will come out either way.”
Jim Rosenthal, managing director and head of firmwide technology and operations at Morgan Stanley, who is co-leading the overall integration office responsible for all aspects of the integration, says, “Synergies will come from every part of the cost structure: from the vendors we buy from — because we'll have consolidated buying power — to the real estate we can use more efficiently, to some aspects of the administrative functions, to simply how we’re able to efficiently manage the overall venture. Major savings are expected from data center, communications networks, hardware and software overlapping functionality.”
Both firms had reengineering and cost savings plans in place before the joint venture was announced, points out Sheree Stomberg, head of operations and technology, Citi Global Wealth Management. “Some of these will carry forward at the same time we’re creating the joint venture,” she says.