Ah HA! A KERNEL.BIN question. I'd be only too happy to help.
Within the KERNEL.BIN, the only data for Sephiroth in the third section are his two scripts. The Init and Main. The Init basically just tells the Main to take control of him. Control can be regained by either NULLing out his INIT pointer (at 0xACE - 0xACF) or NULLing his script pointer (0x630 - 0x631) all together. Sephiroth's stat/HP/MP/Exp curves are probably shared with Cloud. TFergusson believes that Sephiroth's Exp curve is shared by Cloud. Whether or not this is true can only be determined if Sephiroth can level up. Since they can't even get exp during the flashback, then their curves aren't important.
I edited mostly section 4 of KERNEL.BIN. I swapped their stats and IDs.
Swapping IDs (the first byte of character data) doesn't seem to do a whole lot. Instead, try swapping their AI pointers in the third KERNEL.BIN section.
Sephiroth's Init Script (0x0AEE) does this:
BattleVar(Self).CharVar(Flag(0:4)) <- 1 (Activate Main Script)
BattleVar(Self).CharVar(Flag(1:1)) <- 1 (Not sure)
BattleVar(Self).CharVar(Flag(1:0)) <- 1 (Not sure)
BattleVar(Self).CharVar(Flag(1:2)) <- 1 (Not sure)
Not all these flags are known. I'm basing a lot of my info on Akari's findings of battle addresses, but I'm going to guess that one of those Flag(1.x)s sets the invulnerability and one cancels the victory rewards. Try deactivating one at a time to see what happens.
The three bytes in the third KERNEL.BIN section you'll want to try changing are:
0x0AFC, 0x0B06, 0x0B10 to 28h, 29h, or 2Ah. Have one repeat and leave one out and see which one gives you a victory screen.
You can also probably safely point two characters to the same script if you'd like. So changing 0x61E and 0x61F to B2h and 04h respectively will point both Sephiroth and Cloud to the same scripts. You could also use the 75h code in Cloud's INIT script to link his with Sephiroth's scripts (60 0A 75 73; probably safer) then just re-point the INIT script to after the point where it says "Activate Main Script" (change 0xACE from 20h to 2Ah).
There's a lot of info here, so if you want some clear-er directions on my suggestions we'll try again.