Dissidents Push for Spin-off of Securities Division

Dissident former executives of Morgan Stanley stepped up their call for the “immediate” ouster of the chief executive, Philip Purcell, and his management team Thursday, saying they are “highly confident” they can replace the team with five executives who left after a reorganization engineered by Mr. Purcell.In an open letter to shareholders, the group of retired executives also released a 21-page presentation of their plan to break up Morgan Stanley into two companies, responding to criticism that their attacks on Mr. Purcell lacked substance. They proposed returning the firm to its roots, with Morgan Stanley run as a traditional investment bank and the retail, asset management, and credit-card units operated as a separate company under Mr. Purcell.“The proposed spin-off is motivated by a belief that the board of Morgan Stanley faces an immediate crisis and that the firm has been badly served by its present management and leadership,” wrote the eight executives, who are led by a former Morgan Stanley president, Robert Scott, and an ex-chairman, S. Parker Gilbert. “The crisis continues and will likely deepen.”The executives, all of whom have roots in the institutional securities side of the company, could not be reached for comment. A Morgan Stanley spokeswoman declined comment.The proposal would undo Mr. Purcell’s master plan to meld onto Morgan Stanley’s traditional institutional securities and investment banking business the retail brokerage, credit card, and investment management businesses that he ran at Dean Witter Discover Company.Dean Witter bought Morgan Stanley in 1997, engendering a culture war between the two sides of the company that exploded when, at the end of March, Mr. Purcell reorganized the company under new co-presidents, accelerating the exit of the company’s institutional securities president, its top equities executive, and its top two investment bankers.The group said it was “highly confident” that five veteran executives who recently left would return to help the firm “regain its stature and reputation” and stem a recent “tide of departures” of more than 15 bankers and traders.The group proposed that Mr. Scott become interim CEO of the institutional securities company. The former president, Stephan Newhouse, who was ousted in the March overhaul, would join former co-chairman and fabled banker Joseph Perella as vice chairmen, while former equities head John Havens, former investment banking chief Tarik “Terry” Meguid, and former institutional securities head Vikram Pandit, would comprise an “office of the president.”All but Mr. Scott, who was fired in 2004, left after the late March reorganization. That triggered a morale crisis among equity traders and bankers at the firm that Mr. Purcell this week acknowledged.The Group of Eight, as the executives are known, posted their proposed organizational charts, letters to Morgan Stanley’s board and other documents on their plans on a Web site, www.futureofms.com.“We are highly confident that under this leadership structure, these former executives would return,” a footnote to the chart said.In apparent retaliation against veteran fixed-income trader Zoe Cruz and Morgan Chief Administrative Officer Steve Crawford for cooperating with Mr. Purcell by becoming co-presidents, the dissidents didn’t include them in the organizational charts.The Group of Eight did not explain what assurances they received from the departed executives that they would return. A spokesman for Mr. Perella said he had no comment, and others in the group did not return calls for comment or could not be reached.The group proposed that the heads of equities, fixed income, and investment banking installed by Ms. Cruz and Mr. Crawford since the reorganization – Jerker Johansson, Neal Shear, and investment bankers Cory Spencer and Michael Uva – report to the office of the president. All are Morgan Stanley veterans, as are Messrs. Cruz and Crawford.In his reorganization, Mr. Purcell put control of the poorly performing network of more than 11,000 retail brokers, along with the firm’s institutional securities businesses, under new co-presidents, Ms. Cruz and Mr. Crawford. In a presentation to investors this week, the three executives said they were working to better coordinate use of the retail brokers to help sell stocks, bonds and other instruments originated by the investment bank and to repair morale.Ms. Cruz was previously head of the firm’s highly profitable fixed-income division and Mr. Crawford, after a brief stint as an investment banker, has been Mr. Purcell’s chief financial officer and chief administrative officer. Neither was given a place in the organizational chart proposed by the dissidents.“If Morgan Stanley’s optimum strategy is to build a fully integrated securities business – an outcome that Purcell has failed to accomplish in the eight years since the merger with Dean Witter Discover – the strategy requires the immediate replacement of the current leadership team,” the letter from the dissidents said.In revealing details of their plan to the public, the dissidents also are trying to further pressure Morgan Stanley’s board, most of whom have worked closely with Mr. Purcell since the merger. Three independent directors met with the group April 22 to discuss the proposed spin-off of the institutional securities businesses – the units that raise capital for corporations and sell securities to big investors – but the board has not responded, the group’s letter said.The policy to continue pressuring the board to oust Mr. Purcell may work because directors are increasingly sensitive to their corporate-governance responsibilities, no matter how close they are to a CEO or chairman, governance experts said.“My advice to the board is, you have to excuse Mr. Purcell from his current positions,” Tom McLane, vice chairman of the Directorship Search Group, a recruiting firm, said Wednesday before the letter was disclosed. “What he’s doing is not working, the board can’t have it not work forever, and there does not appear to be an internal candidate who can do better than Purcell.”Although the Group of Eight and Scott Sipprelle, another former executive who now runs a hedge fund, have tried to rally investors by citing Morgan Stanley’s lagging returns on equity in the past five years compared to peers, they have not won much public support from investors. The Group of Eight’s letter said it has expanded its spin-off proposal since meeting with the three directors based on discussions with institutional shareholders.In proposing the spin-off, the dissidents noted Morgan Stanley ranks among the top three firms in underwriting IPOs, bond and stock secondary offerings, and merger and acquisition advice but said the company’s competitive standing has been hurt by the departure of “key professionals.”The group also proposed that Dean Witter’s brokerage and investment management unit be combined with the Discover credit card division as a separate company. Mr. Purcell, who helped launch Discover, the fifth-leading issuer of credit cards and a laggard in receivables, recently said he would consider spinning it off to shareholders – a reversal of his position that he would give it at least three years to see if it could meet the company’s growth targets.A spin-off would temporarily hurt the company’s return on equity, Mr. Purcell told institutional investors this week, because other parts of Morgan Stanley benefit from Discover’s generation of capital and high ROE.Splitting the company into its pre-1997 parts would bring shareholders between $9 billion and $20 billion of added market value, the dissidents contended. The company’s current market capitalization – its shares times its current stock price – is about $54 billion. They calculated the implied value of the institutional securities company – using Bear Stearns, Goldman Sachs and Lehman Brothers as models – at about $38 billion and of Dean Witter Discover at about $30 billion, using midpoint valuations.In addition to Mr. Scott, 59, and Mr. Gilbert, 74 – whose stepfather helped found Morgan Stanley almost 70 years ago – others in the dissident group are Anson Beard Jr., Lewis Bernard, Richard Debs, Joseph Fogg III, Frederic Whittemore, and John Wilson. Mr. Purcell is 61, Ms. Cruz is 50, and Mr. Crawford is 40.

Dissidents Push for Spin-off of Securities Division

Dissidents Push for Spin-off of Securities Division

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