It Gets Worse at Morgan Stanley

Chief Executive Philip Purcell's moves may be about self-protection, not performance. Meanwhile, talk of coups and takeovers grows

By Emily Thornton

It was a humiliating day for Morgan Stanley (MWD ), one of Wall Street's most prestigious investment banks. By Mar. 30, just two days after Chairman and Chief Executive Philip Purcell named two new co-presidents to usher in a "new generation of leaders," several key executives had abruptly resigned.

Some research analysts issued reports saying Purcell's own departure would boost the firm's stock price. And former Morgan Stanley top guns attacked Purcell on national television. CNBC even conducted an informal poll asking viewers if they thought Purcell should be fired; 84% of respondents said yes.


  As the heat intensifies, Purcell is only making matters worse. His abrupt decision to reshuffle top management has backfired, leading to new criticism of his leadership. He had already faced a torrent of complaints from investors and former senior managers for damaging Morgan Stanley's performance by mismanaging its retail brokerage and Discover credit-card operations -- both drags on the bank's performance.

Instead of addressing those concerns, Purcell has driven away two of the leaders of the firm's crown jewel -- and the source of nearly two-thirds of its operating profits -- the investment banking division. His actions may even put the company in play. Says Richard Bove, a financial-services analyst at New York investment bank Punk, Ziegel & Co.: "This fight may have gone too far. Humpty Dumpty [has fallen] off the wall."

For now rivals are itching to take advantage of Morgan Stanley's weakness. Analysts say it's a great time to call Morgan's top-drawer clients to try to persuade them to jump ship. Already, phones at the firm are ringing off the hook as headhunters and competitors trawl for talented -- and well-connected -- investment bankers in an effort to lure them away, too.


  Purcell has managed to stop some of the bleeding. He has persuaded some of his heaviest hitters to stay aboard. Legendary dealmaker Joseph Perella, who was promoted to vice-chairman on Mar. 29, says he isn't going anywhere. At a company meeting, Perella said he is sorry two of his "blood brothers" are leaving, but he is sticking with the "best team on Wall Street." Perella denies rumors that he resigned and Purcell wooed him back with a promotion. That "is totally wrong," Perella told BusinessWeek. "I love Morgan Stanley. I work at Morgan Stanley. Period. Full stop."

While Purcell publicly insists that Morgan Stanley's board of directors -- many of them longtime associates of the 61-year-old CEO -- backs him unanimously, pressure is beginning to build for Purcell to be ousted. "We would like the board to move quickly to replace Purcell," says former Morgan Stanley President Robert Scott, one of eight former senior executives who wrote to the board on Mar. 3 to complain about his poor leadership. The board of directors, says Scott, should "understand that we're not going to go away." Some outside observers have an even more brutal take on the situation. Says David Hendler, a financial analyst at New York's CreditSights, an independent research outfit: "Purcell is on his last legs."

So might be the firm in its present form. The scuttlebutt on Wall Street is that Morgan Stanley is sliding dangerously close to being put in play. A takeover by the likes of Citigroup (C ), JPMorgan Chase (JPM ), or Bank of America (BAC ) might be a distant prospect for now. But Wall Street veterans say there is a real possibility that private buyout firms and hedge funds could band together to buy the firm and sell off the pieces.


  Keefe, Bruyette & Woods analyst Lauren Smith estimates that Morgan Stanley has a breakup value of about $67.50 per share, vs. a Mar. 30 closing price of $55.28. These vulture buyers could, for example, sell the retail brokerage, credit-card operations, and asset-management unit -- which are together worth $20 billion or more -- and keep the highly profitable investment bank. That's what many of Purcell's critics would like him to do anyway.

Purcell, of course, disagrees profoundly. He wants to keep the whole operation together and insists that his management changes will fix the firm's problems. Morgan Stanley spokesman Raymond O'Rourke says the board met several times, including sessions without Purcell, to discuss concerns raised by the eight former executives in their letter. They also discussed issues raised in December by former Morgan Stanley Managing Director Scott Sipprelle.

The board unanimously concluded that proposals to sack Purcell or break up Morgan Stanley were not in the firm's best interest. The board also approved Purcell's selection of its chief administrative officer, Stephen Crawford, 40, and its head of fixed income, Zoe Cruz, 50, to lead the firm as co-presidents, pushing aside Stephan Newhouse. "The board has heard, considered, and rejected the opinions from Mr. Sipprelle and from the group of eight advisory directors," says O'Rourke. "They have unanimously affirmed their support for management and the strategy for taking the company forward." By Emily Thornton


  Purcell remains unapologetic about his management choices. He told the firm's managing directors on Mar. 29 that he selected Crawford primarily because of his broad experience and strong feel for the rapidly changing global regulatory environment. Purcell chose Cruz for her solid record in running the firm's fixed-income business, one of Morgan Stanley's most profitable units.

Still, a widespread impression is intensifying that Purcell may be more concerned about holding on to his own job than he is about improving Morgan Stanley. Insiders and competitors alike say Purcell forced out the president of the firm's investment bank, Vikram Pandit, and the head of its equities division, John Havens, to fend off an attempted "coup" they allegedly supported. In the Mar. 3 letter, the eight former Morgan Stanley execs called for Purcell's removal. In the letter they said they feared Purcell might react by trying to "reassign or remove" senior executives in the investment bank. Through a spokesman, the group denies that it is attempting a "coup" and that Pandit or Havens are involved. Neither could be reached for comment.

Some analysts and veterans say Purcell could become Wall Street's version of Walt Disney's (DIS ) Michael Eisner. Like Eisner, Purcell has an extremely loyal board. It backed him when a power struggle resulted in the departure of former President John Mack in 2001. Then it remained silent when Purcell stripped former President Scott of most of his responsibilities in 2003, resulting in his rapid exit. Still, if investors, employees, and clients lose confidence in Purcell, the board may have to take action. David Trone, a financial-services analyst at New York investment bank Fox-Pitt, Kelton, says it's not a foregone conclusion that Purcell will be pressured to step down from the chief executive post, "but we're certainly heading down that path."


  Now it's time for Purcell to win over his troops -- if he can. The weak performance of Morgan Stanley's stock has revived tensions brought on by the 1997 merger of Morgan Stanley and Dean Witter, in large part because Purcell has failed to win the respect of many of the firm's bankers. Insiders say tensions were mounting between Pandit and Purcell over the past several months. By passing over Pandit, insiders say Purcell has made it clear that he demands loyalty from his employees. But it remains to be seen if he or his new co-presidents will get it.

Add it all up, and Purcell has created a raft of new credibility issues for both himself and Morgan Stanley. One optimistic analyst forecast that the barrage of criticism could spur the firm to pull together and prove its critics wrong. Whether or not Purcell remains CEO is an open question. He certainly needs to convince more people than those on his friendly board that he can run a world-class investment bank.

By Thornton is Finance & Banking editor for BusinessWeek in New York

with Mara Der Hovanesian in New York and Stanley Reed in London

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