Morgan Stanley and Citigroup have agreed on more time to decide the purchase price of Morgan Stanley Smith Barney, the two firms’ joint venture, following differing fair market valuations provided by the parent companies during the appraisal process.

The two firms will now determine the fair market value of the business by September 10, 2012.

Morgan Stanley owns 51 per cent of MSSB and is buying another 14 per cent, as announced at the start of June. After Morgan Stanley exercised its right to increase its stake, the firms had 90 days to determine the purchase price. Regulatory approval for Morgan Stanley to increase its stake has been granted.

The original 2009 deal saw Citi exchange 100 per cent of its Smith Barney, Smith Barney Australia and Quilter units for a 49 per cent stake in the venture and an upfront cash payment of $2.7 billion. Meanwhile, Morgan Stanley made the cash payment and exchanged 100 per cent of its global wealth management business for a 51 per cent stake in the joint venture.

The deal gave Morgan Stanley the right to exercise options over time to buy Citigroup’s stake, although Citi said it would “continue to own a significant stake in the joint venture at least through year five.”

During the 90-day appraisal process, both firms exchanged their fair market valuations of the joint venture. These differed by more than 10 per cent, causing a third party to step in.

Citigroup Global Markets made Citi’s appraisal, pricing its 49 per cent stake at around $11 billion. Morgan Stanley’s valuation for the full MSSB joint venture, however, was around 40 per cent of Citi’s valuation of the business, according to a regulatory filing.

Citigroup further said in the filing that due to the "unexpectedly low" valuation given to MSSB by Morgan Stanley, and depending on the ultimate purchase price, it could face "a significant non-cash GAAP charge to net income in the third quarter 2012."

The third party appraisal process – now extended to September 10 – was originally due to conclude at the end of this month, with the sale due to close by September 7.  

Morgan Stanley chief executive James Gorman told an investor conference in June that the US bank will eventually remove the Smith Barney brand to operate as Morgan Stanley Wealth Management. According to a report in Bloomberg, Gorman has said that buying the whole brokerage is key to his strategy, as it will make the firm less reliant on trading revenues and increase profitability.