Morgan Stanley: Life After Mack

The power struggle is over. Here's what winner Phil Purcell has to do to prove he deserved victory

One of the longest running shows on Broadway ended abruptly on Jan. 24. But the final curtain call was not for actors in cat costumes. It was for one of Wall Street's fiercest gladiators, Mack the Knife, Morgan Stanley Dean Witter's charismatic president and chief operating officer, John J. Mack, 55. He had challenged reserved Chairman and Chief Executive Philip J. Purcell for the bank's top job for years before caving in suddenly.

Hundreds of managing directors gathered on Jan. 24 at 2 p.m. on the fourth floor of the firm's headquarters on the edge of New York's Times Square to hear the news. The atmosphere was tense, but on stage, a magnanimous Purcell praised his colleague and how he had "touched" so many executives in the room during his 28-year career. Mack, as smooth as ever, couldn't resist a parting wisecrack: "I was just thinking that many of you probably wish I would have never touched you." After his valedictory, he got a lengthy standing ovation, according to an employee who was there.

Mack owned the crowd that day. But it's Purcell who has finally won undisputed control of the bank. As the then-boss of Dean Witter, Purcell bought Morgan Stanley for $10 billion in 1997 with the idea of harnessing his retail brokerage machine to sell the investment bank's array of products from stock and bond issues to research. The deal was promoted as a merger of equals, but Mack's flashy shock troops consistently racked up revenues and earnings much faster than the Dean Witter retail businesses. By 2000, the securities division was making three- quarters of the firm's overall $5.5 billion net profit on $26 billion of revenues.

That statistic was the key plank in Mack's case that he should be chief executive. Insiders say he repeatedly challenged Purcell for the title. "Purcell didn't only feel threatened. He was threatened," says a senior Wall Street executive familiar with the firm's inner workings. But Mack failed to win board backing to dethrone Purcell, partly because he concentrated on running the investment bank, leaving Purcell to handle board members, insiders say.

BIG STAKE. Despite Mack's departure, both he and Purcell are behaving graciously in public. Mack has told executives he counts on them to protect his legacy--his shareholdings in Morgan Stanley, now worth about $488 million. Meantime, Purcell appointed a Morgan Stanley veteran, and the firm's chief financial officer, Robert G. Scott to replace Mack. And he is dropping the Dean Witter name. From now on, the firm will be known simply as Morgan Stanley.

The key issue Purcell now faces is getting the old Dean Witter parts of the business fully up to speed, while buttressing one of Wall Street's top investment banking franchises and ensuring that the two parts of a sprawling empire with 65,600 employees work together. "Our No. 1 challenge is to see that we are the first financial services company to become truly customer-focused rather than product-focused," he says.

Purcell's most urgent task, as he sees it, is to build up truly global retail asset management and credit-card services. He also wants to increase the firm's market share across all business lines. That's no small feat given that Morgan Stanley has 13.8% of the global market for bond and stock issuances, second only to Goldman, Sachs & Co. And it handled 38% of all mergers and acquisitions worldwide last year, according to Thomson Financial Securities Data Corp.

Achieving his goals without Mack is going to be tough. With a stable of research stars such as Internet diva Mary Meeker and an army of tech bankers at his beck and call, Mack built an impressive New Economy dealmaking team that won business from the likes of America Online, Martha Stewart Living Omnimedia, and And he inspired fierce loyalty. "[Mack] is one of the finest leaders in business," says Meeker. "He leads by example. He's like a great coach."

NOSEDIVE. However, no Hall of Famer ever has a perfect score. And Mack certainly didn't. After Nasdaq's meltdown in spring, 2000, Morgan Stanley missed--for the first time since the merger--the Street's earnings estimates two quarters in a row, even as rivals such as Goldman Sachs and Lehman Brothers Inc. made theirs.

Mack's operations could hardly be faulted for the dearth of lucrative IPOs and debt issues that followed Nasdaq's 45% nosedive. But in the fourth quarter through November, the firm was 23 cents-per-share adrift on earnings. That followed an 8 cents miss in the third quarter caused partly by an estimated $90 million in losses on trading in junk bonds in Mack's part of the shop. Shortly after that, Peter F. Karches, a Mack supporter and head of the department engaged in selling securities to institutions such as pension funds, resigned.

Purcell faces a big challenge in keeping the firm running smoothly with a new team. "In the last two years, the heads of every business line have changed," says James Mitchell, securities industry analyst at Putnam Lovell Securities. "It's a bit of a concern." It certainly worried investors: Morgan Stanley's stock price has fallen 25%, to $85 since Karches quit on Aug. 29.

Indeed, Mack is the latest in a long list of departures by senior execs that began in 1998 when James M. Allwin resigned as head of institutional investment management to start his own money management firm, AETOS Capital LLC. Between Karches' and Mack's departures, at least four other top level people have left. "They were the heart and soul of the place," says a high ranking Wall Street executive.

Industry watchers say the 57-year-old Purcell has shown no desire to retire, so ambitious highfliers see no chance of having a shot at the top job anytime soon. Purcell insists that recent departures don't reflect dissatisfaction inside the company. "It's not an exodus," says Purcell. "It's a new generation of management."

When he needs to be, Purcell can be a master of diplomacy. After all, he won the backing of Morgan Stanley's board to thwart Mack's challenge when the rest of Wall Street was betting he'd fail. Now, he's using the velvet glove approach to win the hearts and minds of his investment bankers. So far, it seems to be working. Joseph Perella, head of global investment banking, says he has no plans to leave the firm. And if recently promoted superstars such as Vikram S. Pandit and Stephan Newhouse, co-heads of global institutional securities, and Zoe Cruz, nicknamed "cruise missile," recently named head of fixed income, stay, he'll have a strong team.

All the same, Purcell, a McKinsey & Co. consultant-turned-banker, has quickly put his stamp on investment banking. Insiders say that although Scott--a part owner of Manhattan's swank Gramercy Tavern and a fly fisherman--is replacing Mack as president, the executives in charge of selling securities to institutions, who used to report to Mack, will now answer directly to Purcell, insiders say.

If there's anywhere Purcell may need to wield the ax, it could be the firm's Discover credit-card unit. Executives from rival card shops say Morgan Stanley has been quietly shopping Discover, which analysts figure could fetch as much as $14 billion. Purcell denies that Discover is for sale. In the short term, he'll have to find a way to improve its growth, despite higher loss and delinquency rates expected this year because of the economic slowdown. And further out he needs to solve the ongoing problem that selling Morgan Stanley's up-market asset-management products to Discover's generally lower-income, less financially savvy clients is an uphill struggle.

People who know him well say that he is used to having his wishes executed without argument: the iron fist inside his velvet glove. Insiders recall that Purcell used to joke after the merger that when he told Dean Witter people to turn left, they would immediately follow orders. But when he told Morgan Stanley employees to turn left, he would need to explain the reasoning behind his request before they'd comply.

Obviously, that approach could ruffle feathers if Purcell needs to bridge cultural differences between class act Morgan Stanley and mass retailer Dean Witter. Purcell insists that's one thing he doesn't have to worry about any more. "That's behind us," he says. However, some insiders believe he may need to break down some walls that still separate Morgan Stanley and Dean Witter. Although Morgan Stanley is commonly cited by financial services executives as the world's most successful financial merger, the operations of Dean Witter and Morgan Stanley have largely remained two distinct kingdoms with separate payrolls, intranet systems, and sets of titles.

All the same, some argue that Morgan Stanley will be better off in the long run with Purcell. "[The merger] has been a huge home run," says Guy Moszkowski, securities industry analyst at Salomon Smith Barney. "The only problem was the two-heads problem."

Although it was his head that rolled in the end, Mack has many options. Some of his friends say he may decide just to play golf for a while. But probably not for long: He's on the list of candidates to head the Securities & Exchange Commission. And he could choose to position himself to succeed another Wall Street mogul such as Citigroup's Sanford I. (Sandy) Weill or Merrill Lynch's David H. Komansky. He could also fill the shoes of Deutsche Bank's Edson Mitchell, who died in a plane crash on Dec. 22. Mack could also start up his own outfit with some of his former lieutenants. Morgan Stanley has told analysts that Mack is not banned from raiding the firm for talent.

The bottom line is that in the past several years Mack has made enough money to do as he likes. "These guys are as rich as God," says a former executive at the firm. How well Morgan Stanley manages to keep such masters of the universe in the future may determine whether it can maintain its leading position in global finance.

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