Wall Street is supposed to be a zero-sum game. Only one side can be right on a trade or deal or pretty much anytime money is involved … which on the Street, is all of the time.
So it’s something of a surprise that the long saga of Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS) haggling over how to split their joint venture in the Smith Barney brokerage business came to such a, well, equitable end.
Morgan Stanley has wanted to buy out Citigroup’s stake in Smith Barney for ages, and Citi has wanted to sell. At issue, of course, was price.
Morgan was hot to get a deal done before any improvement in performance made Smith Barney more expensive. Citi wanted to get out as part of its strategic plan to get smaller and more focused.
Citi, the seller, of course high-balled, saying the business was worth $22 billion.
Morgan, the buyer, naturally low-balled, saying Smith Barney was worth $9 billion.
An independent appraisal put the value at $13.5 billion, or $2 billion north of the midpoint of the bid and the offer.
And that, apparently, made everyone happy. Or happy enough. The sides finally came to a deal Tuesday and shares in both banks rose sharply on the news. MS rallied about 3.5% by late Tuesday trading, while Citi was up more than 2%.
Is it a rare case of win-win on Wall Street? Fitch sure thinks so. The ratings agency called it “a positive development” for MS and a “more modest net positive” for Citi.
But as we warned on Monday, be wary of MS’s red-hot rally. The Smith Barney deal and a couple of prominent analyst upgrades have made shares go positively vertical in September.
All of which makes MS more susceptible to a steeper slide when the risk-off trade comes roaring back.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.