Now, Morgan Stanley Must Make MSSB Platform Work
September 13, 2012
It’s been argued Morgan Stanley picked Citigroup’s pocket in acquiring the remainder of the two firms’ joint brokerage venture, Morgan Stanley Smith Barney.
The price Morgan Stanley agreed to pay, $6.62 billion for Citi’s remaining 35% stake, is “a steal” said JMP Securities LLC analyst David Trone.
Perhaps. The amount Morgan Stanley will end up paying was based on $13.9 billion evaluation.
That’s far below the $22 billion value Citigroup put on the brokerage unit only a few months ago. Ergo, Morgan Stanley got a bargain, and the agreed-upon price will trigger a $2.9 billion after tax charge for Citigroup.
This by-the- numbers way of evaluating of the deal, however, doesn’t take into consideration some of the ongoing, systemic technology problems MSSB has experienced since the joint venture was formed in 2009, according to analysts.
At the time, Brad Hintz, a senior Bernstein analyst, notes that Morgan Stanley told the analyst community it would consolidate on either its technology or that of Citigroup technology.
“Much of the technology that exists here at Smith Barney is outstanding," Morgan Stanley management stated. “One thing we’ve both done is make the right (technology) investments over the last several years.”
A former Morgan Stanley partner and the firm’s ex-treasurer, Hintz says that MSSB was targeting pretax margins of as high as 20 percent. Instead, Hintz says, the results were lackluster.
A problem: Neither one of the platforms succeeded as the platform for the combined business. By April 2010, Morgan Stanley Smith Barney was preparing to launch a new brokerage platform as part of a multiyear overhaul of the brokers’ desktop workstation and back-office. Until this task was completed, MSSB couldn’t realize any of the savings achieved by consolidation, Hintz notes.
By late 2010, the development of a new system large enough to handle 10,000 processes simultaneously and accommodate 7.000 Morgan Stanley advisors and 9,000 more form Smith Barney was ready to go.
“The whole exercise of getting people in the door and training people on a new platform and educating the field out there, the financial advisors and the client support associates who actually sit in the branches, was a lot of effort and energy,’’ Tom Gooley, MSSB’s head of operations told Securities Technology Monitor.
Still, as late as this September of this year, dozens of MSSB financial advisors managing tens of billions in client assets purportedly were threatening to leave the firm because of their dissatisfaction with the new platform.
As a former Morgan Stanley senior executive and MSSB partner as CEO of Citibank, Vikram Pundit apparently was aware of these ongoing problems.
Initially, he had been selling off Citigroup’s ownership in MSSB in portions, but after Morgan Stanley’s CEO James Gorman called him earlier this week, Panditr decided to unload all of Citigroup’s interest in the joint venture.
“The more we put the past behind us, the more we can focus on our future, which is the core business in Citicorp,” he said.