One hell of a marriage

The struggle for control at Morgan Stanley highlights a flaw in the US system.

by Patience Wheatcroft, business and City editor of The Times
Last Updated: 31 Aug 2010

That mergers and takeovers rarely add value to companies is a widely accepted view. Proponents of the macho acquisition theory of business development argue that such negativity cannot be justified, as it's impossible to know how a company might have fared had it relied on organic growth alone.

Investment banks in particular must be positive about the rewards of doing deals, for even if the outcome is less than satisfactory for clients, such activity is deliciously fee-generating for the banks. So it is hugely counter-productive for them when one of their number takes centre stage to demonstrate how a corporate marriage can descend into a ghastly public squabble over failed relationships and finances.

Eight years after the merger of Morgan Stanley and Dean Witter, the group, and in particular its autocratic leader, is under siege from unhappy former executives and investors. Their decision to take the fight into newspapers and onto television screens has focused the spotlight on the dangers of doing deals, even when those involved should be well acquainted with the risks.

Despite the intervening years, the cultural differences between the two firms have never been eradicated. If anything, hostilities have been exacerbated as the Morgan Stanley share price has underperformed its rivals. Putting Morgan Stanley and Dean Witter together was a bit like trying to bring Fortnum & Mason and Asda under the same roof. They might both dub themselves finance houses, but their differences are rather more pronounced than the similarities.

Morgan was the blue-chip Wall Street house; Dean Witter a middle-market, Chicago-based brokerage with a credit card division attached. It is now all too evident that the investment bankers thought it distinctly infra-dig to be involved with a mass-market credit card operation. They might still have felt that way even if the Discovery card had not fallen behind in the marketplace and was perceived to be damaging Morgan Stanley's position with investors.

The ultimate focus of the discontent is Philip Purcell, the all-powerful chairman and chief executive of the group. Purcell comes from the Dean Witter side of the merger. When the deal was done, he secured the top job, with a Morgan Stanley man, John Mack, as number two. But relations between them foundered in 2001 and, in increasingly acrimonious circumstances, Mack was shown the door.

Any unhappiness this fuelled on the banking floor was not reflected in a boardroom heavy with Purcell's Chicago supporters. When Robert Scott, Mack's respected successor, fell out with the CEO in late 2003, he too was the loser.

But Scott is not taking his defeat as final. He is now instrumental in the group of disgruntled individuals trying to unseat Purcell. The eight, known as 'The Grumpy Old Men', have little weight in terms of Morgan Stanley shares but huge gravitas in terms of their Wall Street experience.

They have also recruited one of the Street's slickest operators to spearhead the campaign. Robert Greenhill was a Morgan Stanley banker before he set up his own boutique operation, which has flourished and now operates on both sides of the Atlantic. Greenhill made his fortune from the flotation of his business a couple of years ago, but he is still hungry and grasped the opportunity to wage a public campaign against his former employer, now one of his rivals.

Purcell has no intention of heeding the complaints and graciously moving aside. 'He does not like people coming into his office with dissenting views,' explains Scott. Yet he is clearly prepared to make sacrifices to save his position: the credit card business is now up for sale. Purcell has also tried to assuage feelings with the Morgan Stanley contingent by promoting the popular Zoe Cruz to co-president. Insiders say her nickname, Cruz Missile, is a term of admiration and that her elevation has gone down well with her fellow bankers. Obviously not with all of them, though - witness the recent resignation of vice-chairman Joseph Perella and his deputy.

Purcell may have bought himself a little longer at the helm, although the unedifying tussle raises doubts that go beyond the dubious wisdom of massive mergers, particularly when they cross cultures. For despite all the fuss over the need to improve corporate governance in the US in the wake of Enron and Worldcom, and the rush to bring in the onerous Sarbanes-Oxley legislation, Morgan Stanley's situation has highlighted other failings in the US system.

No matter how disenchanted investors may become, no matter how eager to bring management to book, the company's rules do not allow shareholders to summon an extraordinary general meeting at which they might vote for change; that power rests solely with the board and it is not about to use it. Shareholders need to be able to call managements to account and, on occasion perhaps, to block a gung-ho takeover that could destroy shareholder value.

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