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What Now, Morgan Stanley?

Forbes | June 14, 2005
By Liz Moyer

Despite its warning on second-quarter profits Monday, much of the damage done by three months of upheaval at Morgan Stanley--beyond the huge financial cost of trying to salvage the career of Philip Purcell--falls in the morale category.

In investment banking, that can be a key strategic disadvantage.

Morgan Stanley (nyse: MWD - news - people ) has held onto its market positions in several key categories so far this year, with the lead in the industry rankings for global mergers and acquisitions advisory, according to Thomson Financial. It ranks third in global debt and equity underwriting as of Monday.

But Morgan's top brass has acknowledged there are real morale problems they're working hard to fix--problems brought on by a wave of executive departures since March. The upheaval, along with a tough quarter for the firm, culminated in Monday's announcement that Purcell would retire at 61 after a successor is named.

Then there is the $62 million dollars in stock, pension and retirement benefits that, according to the firm's regulatory filings, Purcell stands to walk away with--another blow to the morale, no doubt, of thousands of Morgan Stanley workers who've seen the value of their stock holdings drop during the last year.

In his memo to employees explaining his decision to leave, Purcell said Monday, "you have done an extraordinary job serving our clients despite the almost daily distraction. I feel strongly that the attacks are unjustified, but unfortunately, they show no signs of abating. A simple reality check tells us that people are spending more time reading about the acrimony and not enough time reading about the outstanding work that is being accomplished by our firm."

Morgan Stanley warned Monday that its earnings per share for the period ending May 31 would be 15% to 20% lower than the same quarter last year. The three months happen to coincide with the management upheaval at the firm, precipitated by Purcell's promotion in late-March of Co-Presidents Zoe Cruz and Stephan Crawford.

Like every other firm on Wall Street, however, the spring months have been challenging in equity and bond capital markets activities. JPMorgan Chase (nyse: JPM - news - people ) issued a profit warning last week, and just about every other firm has talked about weak results dampening overall profits.

But Purcell has been under fire from a group of ex-executives for lackluster results under his leadership. The dissidents have been contacting institutional shareholders in recent months to promote their agenda, which calls for the ouster of Purcell and the separation of the firm's retail and institutional businesses.

"As shareholders of Morgan Stanley, we are pleased that the board has taken this important and necessary first step," the dissidents said in a statement Monday. "We support a comprehensive and timely review by the board of all qualified CEO candidates. We hope that this and future actions will stem the recent tide of departures from the firm and restore a culture and business environment capable of attracting and retaining the best professional talent to Morgan Stanley."

During a presentation in May at the UBS Financial Services Conference, Purcell, along with Cruz and Crawford, presented their vision for an integrated securities firm that puts wholesale banking, retail brokerage and asset management at the center of the strategy. The executives acknowledged that the firm had underperformed by certain measures, but they rejected the idea that separating the businesses was the better course of action.

The board likewise rejected this idea at an emergency meeting April 30, after which it reaffirmed its commitment to Purcell's leadership. Board members say the company is pursuing a spinoff of Discover Financial Services, the firm's credit card division. A proposal will be made to the board at its scheduled meeting June 21, and news of the progress of that plan could come the next day, when Morgan Stanley announces its second-quarter earnings.

Purcell said at the UBS conference last month that morale problems had been limited to its equities and investment banking divisions--and indeed those are the areas where most of the executive departures have taken place in the last three months.

Purcell also said he was working hard to address employee concerns. As if to demonstrate that the media was blowing the turmoil out of proportion, Purcell repeated on Monday that Morgan Stanley has lost a normal amount of managing directors this year (he said in May that the firm had 10% turnover in its managing director ranks each year). The problem, he said, is that this time around every departure is highlighted in the media.

Some analysts said Monday that uncertainty will continue to dog Morgan Stanley until a successor has been named and things can return to relative normalcy. There is also the possibility of additional departures once a new chief comes in, as current management reassesses its standing at the firm.

Purcell's departure, for example, leaves his hand-picked lieutenants Cruz and Crawford in an "untenable situation" that could prompt their departures, says Merrill Lynch analyst Guy Moszkowski.

"There are more issues at Morgan Stanley than just the CEO," said Glenn Schorr, an analyst at UBS. "Improved returns and valuation will likely take two-plus years under new management."


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