Gorman's Morgan Stanley Transformation Begins

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) has received regulatory approvals to complete its purchase of brokerage joint venture Morgan Stanley Smith Barney (MSSB) from Citigroup ( C), in a move CEO James Gorman characterizes as a "historic day" for the nation's second largest standalone investment bank.

The investment bank said Friday it has received the regulatory go-ahead to buy Citigroup's remaining 35% stake in the brokerage joint venture, in a cash deal that values the holding at $4.7 billion.

MSSB is a key piece of Morgan Stanley's push into brokerage businesses and wealth management, as the firm diversifies its earnings from volatile trading and investment banking operations.

Over the long-term, MSSB is also expected to be crucial in helping Morgan Stanley solidify its capital position.

Such stability is key after Morgan Stanley saw its credit ratings cut sharply in 2012.

MSSB will bring in billions in stable deposits to Morgan Stanley, which may help the investment bank build more stable sources of funding. In Federal Reserve stress tests to the banks' capital position, Morgan Stanley focused on buying a remaining MSSB holding from Citigroup over plans to raise its dividend or buyback shares.

Regulators have now approved Morgan Stanley's deployment of cash to buy Citigroup's remaining holding, signaling confidence in the bank's financial health and strategy.

"This is a historic day for Morgan Stanley. It is the culmination of a multi-year effort to transform our business model into one that offers stronger shareholder returns and greater stability in volatile markets," Gorman said in a statement.

"Immediately upon closing, we expect to start seeing the benefits of 100 percent ownership - including an expanded deposit base, unique syndication and distribution capabilities and enhanced opportunities for both our wealth management and institutional clients."

The deal's completion will be Gorman's biggest stamp on Morgan Stanley after taking the reins of the investment bank in the heat of the financial crisis, and there is reason to understand his excitement.

Gorman's Wall Street background centers on wealth management and brokerage businesses. When taking over as CEO in 2009, some questioned whether that experience was the right fit for Morgan Stanley, which is now the nation's only standalone investment banking competitor to Goldman Sachs ( GS).

Initially, Morgan Stanley expected the MSSB brokerage JV to operate at 20% margins, however the unit's performance languished at margins of about 10%. Such underperformance raised question marks about Morgan Stanley's transition and Gorman's strategy.

In recent earnings, however, the unit has performed at margins of nearly 20% indicating Gorman's transformation strategy may very-well deliver solid earnings.

"After a year of significant challenges, Morgan Stanley has reached a pivot point. We demonstrated meaningful progress," Gorman said in a recent earnings announcement.

Morgan Stanley may also have cut a well-priced deal.

In September, Morgan Stanley and Citigroup went to a mediator to value the first leg of the bank's increase of its controlling 51% stake - owned since the joint venture was formed in 2009.

In that independent review, investment bank Perella Weinberg valued the brokerage joint venture at $13.5 billion, roughly $8.5 billion less than the unit was carried on Citigroup's books. Since that valuation, MSSB has posted its best two quarters of earnings.

"This purchase is at our book value and will improve our Basel III Tier 1 Common Ratio by approximately 45 basis points," Citigroup said of Morgan Stanley's MSSB stake acquisition, in a statement.

MSSB is held in the bank's CitiHoldings unit and is part of a divestment and recapitalization effort that has already netted $600 billion in asset sales.

A quicker-than-forecast acquisition of all of MSSB and the unit's rising performance has boosted Morgan Stanley's shares in 2013.

Morgan Stanley shares have gained over 30% year-to-date on improving brokerage earnings, even as turnover in the company's fixed income trading unit and poor performance drag on earnings. Those gains outperform Morgan Stanley's biggest rivals such as Goldman Sachs, JPMorgan, Bank of America and Citigroup.

In pre-market Friday trading, Morgan Stanley shares gained less than 1% to $25.22.

-- Written by Antoine Gara in New York