Morgan Stanley, Citigroup May Merge Brokerage Units

Morgan Stanley and Citigroup are deep in talks about a merger of their respective brokerage operations, according to people familiar with the situation.

The deal would be structured as a joint venture, but would involve a payment from Morgan Stanley (NYSE: ms) to Citi

(NYSE: c) of an undisclosed sum that would give Morgan the larger stake in the venture.

The move would combine Morgan's brokerage unit with 8,000 brokers and Smith Barney, which has 11,000 brokers. It would create the nation's largest single brokerage, beating Bank of America's newly acquired Merrill Lynch unit, which has 16,000 brokers.

Morgan Stanley would have the right over a period of years to increase its stake in the joint venture and ultimately buy all of it, according to sources.

The deal, in effect, would become a long term sale of Smith Barney to Morgan Stanley.

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