Morgan Stanley chief executive James Gorman said it would take “an extraordinary event” for him to accelerate his purchase of all of the Smith Barney brokerage firm, despite earlier speculation that he was planning to pay up to $10 billion to complete the purchase of the remaining 51% of the sales force from parent, Citigroup (C).
Gorman made his remarks in an interview with the FOX Business Network this afternoon, after Morgan (MS) reported strong first-quarter results. Shares of Morgan spiked on the news that despite a first-quarter loss related to the accounting treatment of its debt, the firm announced higher-than-expected revenues.
They are the clearest statements to date about whether he will try and buy all of the remaining Smith Barney stake that Morgan doesn’t own under a 2009 deal with Citigroup where Morgan purchased a 49% stake in the brokerage with the option to buy the remainder in chunks over the next five years.
People inside Morgan Stanley have told the FOX Business Network that the firm has recently had high-level discussions about accelerating the purchase plan, going beyond the 14% it is obligated to buy this May under the deal, to the entire remaining 51% stake immediately.
But Gorman suggested buying all of Smith Barney was now off the table, telling FBN that he has “a very clear time frame, next month 14%, the year after 15% and the year after that 20%. We will follow that plan…It will take something extraordinary to knock us off that game plan.”
Gorman said that “extraordinary” event would begin with a telephone call from Citigroup chief executive Vikram Pandit asking if Morgan would be interested in buying the rest of the brokerage immediately. “Always happy to listen if someone wants to accelerate that,” he added.
A Citigroup spokesman declined to comment but a person close to the big bank said Pandit has yet to call Gorman and offer to sell the entire Smith Barney stake to Morgan Stanley. This person added that Pandit expects Gorman to make the first move if he is truly interested in buying all of Smith Barney in May.
One problem Gorman faces with accelerating the Smith Barney purchase is skepticism from the rating agencies; Morgan Stanley has been put on notice by Moody’s Investors Service that it might have its ratings slashed as much as three notches to Baa2 (two notches above junk-bond status) over general concern about the health brokerage business.
People close to Morgan say Gorman has recently held discussions with officials at Moody’s about the downgrade threat and has discussed with that raters the possibility of how a complete purchase of Smith Barney this year would affect its decision.
But officials at Moody’s fretted about the firm spending so much money at a time when regulators are demanding that firms like Morgan generally increase their capital levels, and general worries about banks' exposure to troubled European economies. Morgan would also need regulatory approval to accelerate the purchase.
A spokesman for Moody’s didn’t return an email for comment.
“If he’s backing away from a complete purchase, it’s because of Moody’s,” said a Morgan Stanley executive who spoke on the condition of anonymity.
During his interview with FOX Business, Gorman also said he doesn’t expect a shareholder rebuke of his 2011 compensation package similar to the one recently delivered to Pandit by Citigroup shareholders.
A non-binding shareholder vote over CEO compensation is required under the Dodd Frank financial reform law. With shares of Morgan down around 30% over the past year, Gorman is scheduled to earn $11 million for 2011, which is 25% less than he earned last year.