Thursday, June 02, 2005

Eight Men Out….Take Your Balls and Go Home!

Recently, eight former directors of Morgan Stanley staged an attempt to overthrow current CEO Phil Purcell and insert themselves, along with several recently departed senior executives, in leadership positions. The plan was simple: leverage their one percent equity stake in Morgan Stanley and exploit their prestige as retired and/ or recently fired Morgan Stanley directors to promote their idea of how Morgan Stanley should be run.

No one can deny that Morgan Stanley under Phil Purcell has lately stumbled on hard times. In the past year, Morgan Stanley stock price has lagged behind its financial competition, numerous top level executives have exited the firm, and it has faced two highly-publicized lawsuits. One of those lawsuits ended with a jury awarding Ron Perelman $1.4 billion in damages for Morgan Stanley’s perceived mismanaging of the sale of Mr. Perelman’s Coleman Company.

Soon after the Group of Eight made their case public, Morgan Stanley announced a plan to spin off its Discover Card unit, a move that was seen as a reversal of strategy for Mr. Purcell. Purcell had always toted Discover as part of Morgan Stanley’s strategy to remain diversified and help smooth earnings when the market took a downturn. Most critics and analysts viewed the spin-off of Discover as a strategy chosen by the Board of Directors’ and/or Mr. Purcell’s attempt to throw the group of eight a bone, hopefully ending their public attacks.

Despite recent difficulties, Morgan Stanley still sits atop the vaunted league tables in most of the major investment banking categories: M&A, Debt underwriting, and Equities. Morgan Stanley recently jumped 16 spots from number 25 to number 9 in a recent Fortune Magazine poll asking MBA grads to rank their most desirable employer. Morgan Stanley placed ahead of Lehman Brothers, Bear Sterns and Merrill Lynch, trailing only Goldman Sachs amongst investment banks.

If the group of eight were serious about effectively reforming their former firm, they should have brushed up on their history first. Teddy Roosevelt once said ‘walk softly and carry a big stick’. The group of eight, with their one percent equity stake, instead decided to run like a bull in a china stop and wear a bell around their neck. The group of eight could have used their Wall Street connections to obtain some institutional backing and maybe even set a goal for a double digit equity stake in favor of ousting Phil Purcell. Everyone thought Michael Eisner was in trouble at Disney in the early 2000’s due to a struggling stock price and poor growth, but it was not until some of the big institutional players like CalPers got involved that the Disney board decided to act.

In terms of strategy, the group of eight would have been much better off not going directly for the throat of Mr. Purcell. In taking such harsh actions, they left Mr. Purcell no choice but to staunchly defend himself. The group of eight also placed current employees and shareholders in a sticky situation, having to choose between the current CEO and the former directors. Their approach backfired, and although they were able to drum up plenty of media attention, they never really acquired enough shareholders’ or board of directors’ votes, the items that mattered most.

The silver lining of this Wall Street soap opera is that it has brought attention to the fact that Morgan Stanley stock has been lagging and that Mr. Purcell does need to come up with some answers or seriously consider handing over the reins to someone else. More importantly, it brings attention to the importance of an independent board of directors and the significant roll the board should play in corporate America. Morgan Stanley’s board, largely consisting of Purcell’s ex-McKinsey buddies, certainly does not fit the ideal of a truly independent board. Morgan Stanley shareholders cannot blindly assume that the board is acting in their best interest, but instead must actively consider not re-electing some of the existing directors at re-election time.

We feel that one of the problems with the group of eight is that they still are upset about the 1997 merger between the two financial behemoths Dean Witter Discover and Morgan Stanley. The often overlooked fact is that Dean Witter Discover bought Morgan Stanley and eventually dropped the Dean Witter name in favor of the Morgan Stanley name. It is no secret that the executives at the white shoe Morgan Stanley never liked the idea of being taken over by the gym shoes of Dean Witter. However, that takeover is the past and they must focus their attention on Purcell’s current strategic vision and the opportunities and challenges facing Morgan Stanley going forward.

In conclusion, the group of eight is like the kid who had the basketball at the park and would let others use it only as long as he was playing. Well, as in every playground around the world, the kid with the ball ends up getting beaten up, and like most kids with the ball he does not like it, so he clearly states for everyone in the park to hear, “if I can’t play I’m going to take my ball and go home.” Our advice to the kid and the group of eight are you got beat fair and square and now its time to take your ball and go home or sit down, shut-up, and watch to see how the game unfolds. Maybe you will play in the next game (particularly if you can get some big institutional investors on your side), maybe you won’t, but you had your chance, you lost…so deal with it and deal with it privately.

-Vlad Bystricky, Tim Ligue, Justin Segool


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