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Net Net: Promoting innovation and managing change

Morgan Stanley-Smith Barney Brokerage Merger Hits Snags, Delays

James Gorman

Aspects of the merger between the wealth management arm of Morgan Stanley and Citigroup’s Smith Barney have been going so poorly that it has become the focus of recent discussions by Morgan Stanley’s board of directors.

The board has held open discussions on the merger recently, according to a person familiar with the matter. The board is considering pushing back the timeline for completing the merger from September of 2011 to January of 2012, the person said.

A spokesman for Morgan Stanley denied that any change had been made to the merger timeline. "We've met every deadline that has been set. We are on schedule," the spokesman said.

Independent sources both inside and outside the company, however, confirm the delays. The primary difficulty with the merger is technological, according to our sources. The Smith Barney financial advisers from Citi are being moved onto Morgan Stanley’s platform. But the process of this technological change is taking longer and costing far more than expected, according to people familiar with the matter.

Morgan Stanley's systems operate on a web based platform, while Smith Barney's are on an older, server-based system. But Smith Barney's older system has some capabilities that Morgan Stanley hopes to incorporate in the integrated platform.

The technological problems are creating a larger problem for the joint venture, according to people familiar with the situation. With so much time and money devoted to solving the technological issues, the firm is finding itself constrained from offering customers the kind of enriched offerings it had hoped the merger would produce, sources say.

Morgan Stanley flatly denied the allegations of delays or unexpected costs.

"Integration has met every deadline that was set. We are on schedule to complete the systems integration by around Labor Day 2011, and we'll then go through the stages of rolling it out across the company," a company spokesman said.

The spokesman said that the board is regularly briefed on matters regarding the merger. He said that there have been no recent meetings expressly focused on delays. Independent sources familiar with the situation tell a different story, however.

The talk of delays is leading to speculation that Charlie Johnston, the president of the Morgan Stanley-Smith Barney joint venture, may be losing the confidence of Morgan Stanley chief executive James Gorman. There is the possibility, or at least speculation about the possibility, that Johnston could be taken out of his position.

Johnston, a long time wealth management executive, was named president when the joint venture was announced in January 2009. He had been president of Citi’s U.S. wealth management business prior to that. He has primary operational responsibility for the merger.

Morgan Stanley's spokesman says that morale among the financial advisers is very high.

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