Faithful readers will recall our extensive coverage of Trustee Robert Scott’s ‘68 (eventually successful) effort to force of out Phil Purcell, the semi-competent CEO of Morgan Stanley. Best part of the conflict was Senator Orrin Hatch referring to Scott and his allies as “limp wristed.”
The New York Times reports that Morgan Stanley has now followed the advice of Scott and his fellow limp-wristed, grumpy, old men.
He built it. Now he is taking it apart.
John J. Mack, in his boldest strategic move since he became chief executive last year, said yesterday that Morgan Stanley would spin off its slow-growing credit card unit, Discover.
For Mr. Mack, a mastermind behind the 1997 merger with Dean Witter, Discover & Company that brought Discover into the Morgan Stanley fold, the decision is a tacit recognition that the firm’s future success lies with its traditional heart, its lucrative trading and investment banking business.
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“The soul is back,” said Anson M. Beard Jr., an advisory director at Morgan Stanley. Mr. Beard was part of a group of former executives who started a shareholder revolt that forced the departure last year of the previous chief executive, Philip J. Purcell. “You have to give John credit for that.”
Not really. Mack didn’t (seem to) do anything to help force out Purcell. In fact, he just sat and watched and then was rewarded when the board needed someone to run Morgan Stanley but, for whatever reason, refused to turn to Scott.
Perhaps Beard means that Mack deserves credit for realizing, after a decade of being wrong, that Morgan Stanley is much better off following the lead of Goldman Sachs: avoiding credit cards, retail brokerage and all the other detritus involved with normal clients while focusing on M&A and proprietary trading.
Better late than never.
Ties between Mr. Mack and the original group of eight Morgan Stanley dissidents have warmed noticeably in the last year. They had become strained when it became clear that top executives like Vikram S. Pandit and Joseph R. Perella would not return to the firm.
A few months ago, Mr. Mack invited Mr. Beard; a former president, Robert G. Scott; and a former chairman, S. Parker Gilbert, among others, to lunch at the firm’s headquarters, where he brought them up to date on his strategic thinking.
Must have been a bittersweet lunch for Scott. Although he must be pleased to see Purcell gone, and his vision for Morgan Stanley as a first and foremost a trading and advisory firm vindicated, the sight of John Mack in control must be a bit galling. Mack was very, very wrong a decade ago about what Morgan Stanley should do. Instead of being punished for this mistake, the fates have rewarded him with the CEO job and a $40 million payday, just for 2006. Where is the justice in that? Recall the history.
The Morgan Stanley Group, one of Wall Street’s elite investment firms, and Dean Witter, Discover & Company, which sells stocks and bonds to small investors, agreed to merge yesterday into the world’s biggest securities company in a transaction valued at $10.2 billion.
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But the new firm faces the stiff challenge of integrating Morgan Stanley’s aristocratic culture, where managing directors routinely make millions of dollars a year for advising companies like AT&T, with the meat-and-potatoes environment at Dean Witter Reynolds, whose brokers ply their trade everywhere from suburban office complexes to small-town storefronts. In a way, the merger would be as if Sears and Saks Fifth Avenue decided to join.
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Financial marriages, though, are easier contemplated than consummated. For example, Citicorp and American Express discussed a merger late last year and then discarded the idea.
The new company, to be named Morgan Stanley, Dean Witter, Discover & Company, would have a total stock-market value of $23.3 billion at yesterday’s closing price, compared with Merrill Lynch’s $14 billion. It would also have a total of $270 billion in assets under management, including mutual funds and individual accounts, the most of any securities firm.
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Morgan Stanley’s stock soared by $7.875 a share on the New York Stock Exchange yesterday, to $54.25. Dean Witter’s shares gained $2 each, to $40.625. The deal was reported by The Wall Street Journal yesterday.
”It makes sense to pick your partner,” Richard B. Fisher, Morgan Stanley’s chairman, said at a news conference in midtown Manhattan yesterday. Mr. Fisher will become chairman of the executive committee of the new firm’s board of 14 directors, half drawn from Dean Witter and half from Morgan Stanley. ”We have initiated this and produced this opportunity together because we believe this is the strongest possible combination we could make.”
Philip J. Purcell, Dean Witter’s top executive, will become chairman and chief executive of the combined company. His No. 2 will be John J. Mack, now Morgan Stanley’s president.
”This is as close to an ideal merger as there is,” Mr. Purcell said. ”It may be a more gray and rainy day for some of our competitors.”
Morgan Stanley and Dean Witter had discussed working together intermittently during the last three years, the firm’s top executives said yesterday, and had even considered possible joint ventures in 1995. The logic, these executives said, was obvious.
But Dean Witter, which gained its independence from Sears, Roebuck & Company only in 1993, seems to have been the more hesitant of the two partners. Mr. Mack was determined to forge an alliance with a big Main Street firm and was fearful that if he did not succeed, his own company — even with equity capital of $5.4 billion — could become a takeover target.
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Detailed discussions between Mr. Mack and Mr. Purcell began last summer, but it was only in recent weeks that it became clear that a merger would probably result, executives said yesterday. Both senior managements saw such combinations as Nationsbank’s takeover of Boatmen’s Bancshares, and even Salomon Brothers Inc.’s recent link with Fidelity Brokerage Services Inc. as evidence that it was better to move quickly before either company might itself attract the attention of other predators. The merger was clinched by the signing of a definitive agreement earlier this week.
The new combination, however, holds risks for both firms and for their clients and shareholders. Mergers of equals are notoriously difficult to carry out, and often one partner emerges as the dominant force, as the managment team at Chemical Banking has done in its merger with the Chase Manhattan Bank. Morgan Stanley and Dean Witter called meetings for today to get the merger moving as quickly as possible.
The people at the top of financial services firms, and particularly on Wall Street, are well-known for their powerful egos and ruthless plays for management power and huge financial compensation. This often makes smooth cooperation among senior executives difficult. At yesterday’s news conference, Mr. Purcell sat sandwiched between Mr. Fisher and Mr. Mack, both of whom have proved themselves adept board-room politicians at Morgan.
Morgan Stanley was formed in 1935 out of the bond department of the House of Morgan after the passage of the Glass-Steagall Act that separated the securities and banking businesses in reaction to the 1929 Wall Street Crash and the ensuing worldwide depression. It has always prided itself on its blue-blood heritage. Its 1995 annual report to shareholders trumpeted the principle that J. P. Morgan Jr., one of its founders, enunciated 62 years earlier: ”At all times the idea of only doing first-class business, and that in a first-class way, has been before our minds.”
Despite some digging, I have not been able to determine what Scott thought of the ill-fated merger with Dean Witter, back in 1997. Had he fought it or had he already lost out to Mack within Morgan Stanley? Scott also suffered a heart attack shortly after the merger was announced (and after he had been named to supervise the details). Perhaps that heart attack was the proverbial nail which allowed Purcell to win the boardroom battle to come.
Anyway, there is a great senior thesis to be written about the last 10 years at Morgan Stanley, and the evolution of the finance system of which it has been a part. A decade ago, smart people thought that the leading financial firms of the future would have a significant connection to average investors. I don’t know anyone who thinks that now.
Bob Scott has seen it all. Some smart junior ought to e-mail him and set up a phone interview. He is an engaging fellow and was kind enough to chat with a sophomore whom I put in touch with him last summer.
