ANALYSIS - Citi-Morgan Stanley broker deal is full of risks

By Joseph A. Giannone

NEW YORK, Jan 12 (Reuters) - Combining Citigroup's Smith Barney with Morgan Stanley's brokerage division would generate much-needed capital for Citi and make Morgan a top U.S. retail wealth manager, but analysts warn that such deals seldom pan out, even in good times.

Citi is expected to announce plans to combine Smith Barney with Morgan's individual investor business in a venture run by Morgan. The investment bank would pay Citi up to $3 billion in cash for a 51 percent stake in the venture, according to sources familiar with the matter.

Analysts estimate that such a deal would yield an equity boost of about $6 billion for Citi and reinforce Morgan's reliance on affluent and middle class individual investors.

Yet Wall Street mergers work better in theory than in practice, analysts said, and Morgan is making a bold bet by expanding its brokerage at a time when many Americans are dealing with the challenges of a shrinking economy.

"The newly combined company will likely face a multiyear retail downturn as it attempts the difficult effort of integrating the businesses," Bernstein Research analyst Brad Hintz told clients on Monday.

Talks between the two companies continued over the weekend. An agreement is expected to be announced this week.

If the companies agree, the venture would be a giant in the brokerage industry, with 22,000 advisers and $1.8 trillion in client assets. Bank of America Corp, which acquired brokerage Merrill Lynch 11 days ago, has 20,000 brokers and more than $2 trillion in assets.

Shares of Citi fell 7 percent to $6.28 in early trade, while Morgan shares rose 5 percent to $20.00, their highest level in three months.