Morgan Stanley Dissidents Name CEO Choice

The offer to sell its Discover Card business won't be nearly enough to save the job of Morgan Stanley's embattled chief executive, Philip Purcell, if eight dissident former senior Morgan Stanley executives have their way.

The group yesterday named one of its members and a former president of the firm, Robert Scott, 59, as its choice to lead the company.

Mr. Scott, a 33-year Morgan Stanley veteran, was forced out of the firm in December 2003 in a power struggle with Mr. Purcell.

The dissidents' move comes a day after Mr. Purcell said he would spin off the Discover credit card unit to focus on the securities business in an apparent effort to appease them.

The former executives, who refer to themselves on their Web site as "The Group of Eight," have also outlined sweeping changes in how they believe Morgan Stanley should be run.

In a statement, the former executives - Mr. Scott, Joseph Fogg, Anson Beard, Lewis Bernard, Richard Debs, Frederick Whittemore, and John Wilson - said they would create a multi-executive office of the president and would seek to name a non-executive chairman with financial industry experience. They would also try and hire back many of the high-profile senior managers who left during the past two weeks, including former president Stephen Newhouse and Institutional Securities Group head, Vikram Pandit.

The former executives said they seek to restore much of the collegial atmosphere that they claim Mr. Purcell has destroyed.

"I promise to create an environment in which talent is recognized and supported and which encourages free and open discussion," Mr. Scott said in the statement.

A Morgan Stanley spokesman, Mark Lake, said, "The Board is well acquainted with Mr. Scott and his record while running our Individual Investor and Discover Card businesses, and reiterates the message communicated to employees yesterday: 'The Board is fully behind Phil [Purcell] and the management team. There is no fair or compelling case for a change in the CEO, an action that would involve risk and discontinuity.'"

To some observers, the biggest risks to Morgan Stanley currently come from Mr. Purcell fighting to save his job by offering to spin-off units in the hope of appeasing the former executives. A former Morgan Stanley mergers and acquisition banker, Christopher Atayan, sees the potential sale as an example of Mr. Purcell and the board's inability to grasp the rudiments of investor psychology. "They do not understand that investors have no loyalty to anything but return," said Mr.Atayan. "This will simply create more desire for spin-offs and sales."

What's worse, it makes the dissident's job easier by giving the impression that a key part of their argument - that the stock is undervalued because of management missteps - is valid, he said.

Mr. Atayan, now a private equity investor in Manhattan, said the company is up against men who "pretty much invented corporate takeover and defense. They know all the tricks."

Moreover, they have an instant reservoir of good faith with most Morgan Stanley veterans given their decades of management experience. Mr. Atayan speculated that the numerous Morgan Stanley alumni in senior positions at rival dealers might be interested in buying the firm if the stock price remains under pressure.

Selling the Discover Card unit - or the firm, for that matter - misses the point of what the dissidents are trying to do, said their spokesman, Andrew Merrill.

"What we are trying to do here is remove Philip Purcell, not break the company up or sell it," he said. "Phil Purcell has a major people problem, not a major problem with the operating units."

Mr. Merrill said the group's strategy is now contacting and persuading major institutional shareholders to back them, although he declined to name the investors they have approached.

Mr. Purcell's departure is a foregone conclusion, according to CreditSights analyst David Hendler.

"The stock investors hate the drama and defections this will cause, and the bond guys hate the sale of steady, cash flow positive units," said Mr. Hendler. The only question, he said, is whether he steps down before or after the Discover sale. "He's already admitted defeat by offering to break up the financial conglomerate model he pitched the Dean Witter merger on."

Mr. Hendler said the best outcome of what he called "the partners war," referring to the fact that the Group of Eight were all equity holders in Morgan Stanley prior to its 1985 initial public offering, would be a return to a pure investment-banking model.

"It must kill old-line Morgan Stanley guys that their stock sells for $50 below Goldman Sachs' when they the firm did $10 billion more in revenue," he said.

Last year, Goldman, which has no national retail stock brokerage and no credit cards, had a profit of $4.55 billion on $29.84 billion in revenue; Morgan Stanley, which includes both Dean Witter and Discover, did $39.55 billion in sales and had profit of $4.51 billion.

The sale of Discover would fetch between $10 billion and $14 billion, said CreditSights' Mr. Hendler, with credit card guarantee powerhouse GE Capital the most likely buyer. "After that, they just have to spin off Dean Witter and get back to their roots."