Morgan Stanley 2010 Annual Report Download - page 147

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Morgan Stanley Smith Barney Holdings LLC.
Smith Barney. On May 31, 2009, the Company and Citigroup Inc. (“Citi”) consummated the combination of
the Company’s Global Wealth Management Group and the businesses of Citi’s Smith Barney in the U.S., Quilter
Holdings Ltd in the United Kingdom (“U.K.”), and Smith Barney Australia (collectively, “Smith Barney”). In
addition to the Company’s contribution of respective businesses to MSSB, the Company paid Citi $2,755 million
in cash. The combined businesses operate as Morgan Stanley Smith Barney. At December 31, 2010, pursuant to
the terms of the amended contribution agreement, dated at May 29, 2009, certain businesses of Smith Barney and
Morgan Stanley have been and will continue to be contributed to MSSB (the “delayed contribution businesses”).
Morgan Stanley and Citi each owned their delayed contribution businesses until they were transferred to MSSB
and gains and losses from such businesses were allocated to the Company’s and Citi’s respective share of
MSSB’s gains and losses.
The Company owns 51% and Citi owns 49% of MSSB, with the Company having appointed four directors to the
MSSB board and Citi having appointed two directors. As part of the acquisition, the Company has the option
(i) following the third anniversary of the Closing Date to purchase a portion of Citi’s interest in MSSB
representing 14% of the total outstanding MSSB interests, (ii) following the fourth anniversary of the Closing
Date to purchase a portion of Citi’s interest in MSSB representing an additional 15% of the total outstanding
MSSB interests and (iii) following the fifth anniversary of the Closing Date to purchase the remainder of Citi’s
interest in MSSB. The Company may call all of Citi’s interest in MSSB upon a change in control of Citi. Citi
may put all of its interest in MSSB to the Company upon a change in control of the Company or following the
later of the sixth anniversary of the Closing Date and the one-year anniversary of the Company’s exercise of the
call described in clause (ii) above. The purchase price for the call and put rights described above is the fair
market value of the purchased interests determined pursuant to an appraisal process.
At May 31, 2009, the Company included MSSB in its consolidated financial statements. The results of MSSB are
included within the Global Wealth Management Group business segment.
The Company accounted for the transaction using the acquisition method of accounting. The fair value of the
total consideration transferred to Citi amounted to approximately $6,087 million, and the fair value of Citi’s
equity in MSSB was approximately $3,973 million. The acquisition method of accounting prescribes the full
goodwill method even in business combinations in which the acquirer holds less than 100% of the equity
interests in the acquiree at acquisition date. Accordingly, the full fair value of Smith Barney was allocated to the
fair value of assets acquired and liabilities assumed to derive the goodwill amount of approximately
$5,208 million, which represents synergies of combining the two businesses.
The following table summarizes the allocation of the final purchase price to the net assets of Smith Barney at
May 31, 2009 (dollars in millions):
Total fair value of consideration transferred ............................................... $ 6,087
Total fair value of noncontrolling interest ................................................. 3,973
Total fair value of Smith Barney(1) ...................................................... 10,060
Total fair value of net assets acquired .................................................... 4,852
Acquisition-related goodwill(2) ......................................................... $ 5,208
(1) Total fair value of Smith Barney is inclusive of control premium.
(2) Goodwill is recorded within the Global Wealth Management Group business segment. Approximately $964 million of goodwill is
deductible for tax purposes.
141