Morgan Stanley's Megamerger: They Said It Would Never Work

But after a year, Morgan Stanley and Dean Witter are meshing

If you want to know how the Morgan Stanley Dean Witter merger is working, just ask Ira Walker, a veteran Dean Witter broker. Since the May, 1997, deal, Walker has seen his business almost double. True, half of that is because of the bull market, he estimates. But he says the other half is from the merger. Simply put, Walker has more and better merchandise to sell. For starters, he has Morgan Stanley's fat book of initial public and secondary stock offerings. He also has Morgan Stanley mutual funds to sell in addition to those of Dean Witter and other companies.

And he has more and better research ideas to hawk, since Morgan Stanley's research department has more analysts and is far more highly ranked than Dean Witter's was. Morgan Stanley's investment banking reputation helps Walker attract small- to medium-size corporate clients. Best of all is the upscale Morgan Stanley name, which trumps the blue-collar Dean Witter brand. Says Walker: "It's been fantastic for myself and all the financial advisers at the firm."

A FIRST. Certainly, that was not the view when the deal was announced in February, 1997. Extreme skepticism greeted Richard B. Fisher and John J. Mack, Morgan Stanley & Co.'s chief executive and president, and Philip J. Purcell, CEO of Dean Witter, Discover & Co., when they announced the deal in New York. It was the first major financial services combination in the late 1990s. And the cultural chasm between the two firms inspired such witticisms as "white shoe meets white belt" and "the Four Seasons meets Burger King."

Yet a little more than a year later, Morgan Stanley Dean Witter is a resounding success. The firm's stock has doubled, earnings are "growing faster than the market and the industry," says Sanford C. Bernstein analyst Sallie Krawcheck. Brokers' new accounts are up 40%, as are mutual-fund sales, says James F. Higgins, who heads the firm's retail business. And largely on the strength of the Morgan Stanley name, the firm has recruited 1,000 brokers, an unprecedented annual increase. This extra selling power has boosted Morgan Stanley Dean Witter's rankings on the institutional side (table). "If you look at what happened to profits last year and in the first quarter and at our stock price, it's been a pretty great year for our shareholders," says Purcell, CEO of the combined company.

Putting Morgan Stanley Dean Witter research in the hands of the brokers "was like giving them an elixir," says Mack, president of Morgan Stanley Dean Witter. "Everything that we talked about in the past few years has worked, but at a multiple of what we thought it would be."

Of course, the real test is not just selling Morgan Stanley products to retail clients, but whether the products perform well over time. The Competitive Edge mutual fund, launched in February and made up of 40 of Morgan Stanley's best research ideas, is up 1.6%, vs. 6% for the Standard & Poor's 500-Stock Index. And in March, as the sole underwriter of $2 billion in Sunbeam Corp. debt, Morgan Stanley Dean Witter institutional clients saw their bonds plummet on Sunbeam's recent woes. Brokers' enthusiasm might have been tempered if their clients were holding those bonds.

LIKE MEETS LIKE. But so far, bad deals are the exception. One reason the merger has worked is that both are securities firms. Combinations that throw together banks, insurance companies, and other disparate units are more difficult. The Morgan deal brought together two extremely complementary players: Morgan Stanley is a strong manufacturer of financial products, and Dean Witter is a strong distributor. "I hate to admit it, but it has gone pretty well and better than we expected," says one competitor.

Another reason for the success is that the firm hasn't tried to integrate the two entities. They are in large part still separate, culturally and legally, but with bridges built between the two where needed. There are still two legal broker-dealers, Morgan Stanley & Co. and Dean Witter Reynolds Inc., two separate computer operating systems, and two separate headquarters--the corporate HQ is at 1585 Broadway, and Dean Witter remains at Two World Trade Center. The only combined areas are the executive suite, the investment bank, and the equity-research department. And only 300 employees out of 48,000 lost their jobs, says the firm.

That's not to say there hasn't been dislocation, turmoil, and grumbling in the ranks. The biggest changes came at the top. Mack, slated to become Morgan Stanley's chief executive, agreed to take the president's job to pave the way for the deal. Mack and Purcell work as partners, have adjacent offices, and say that neither makes big decisions without checking with the other. Purcell acknowledges that the new setup has meant some adjustments for him, Mack, and their staff. "John likes to say, `There has been a merger,"' says Purcell. "It takes a while for everyone to figure out it's a different company and that different is better."

And Morgan Stanley Dean Witter is still unfinished. Purcell and Mack are probably mulling further acquisitions, possibly a bank or an insurance company, although they deny any such plans. Purcell and Mack's goal is to rank no lower than fourth in each business the firm is in--the core businesses being securities, asset management, and credit. That's why they have sold three small, unrelated businesses.

LAGGARD. Some analysts believe that the ailing Discover Card and possibly Van Kampen could be sold next. Discover is a laggard because of growing provisions for loan losses. Building a global brand name such as American Express is another huge challenge. The firm just dropped Discover from its name for brevity and ultimately may drop Dean Witter as well. Already, the firm plans to phase out the faux Dean Witter character who has appeared in its television commercials.

The real test will come when times turn tough. "They've been smart in their execution and lucky," says Goldman Sachs & Co. analyst Richard K. Strauss. "If the stock market had gone bad after the deal, they would have become a big ocean liner at exactly the wrong time." But weathering a downturn will be easier with one stellar year behind them.

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