A Sporting Chance

When the University of Notre Dame fired football coach Tyrone Willingham for subpar performance, one of the people at the center of the decision was university trustee and Morgan Stanley chairman and CEO Philip Purcell. If things do not change soon at Morgan, Purcell could soon find himself facing Willingham's fate. This is the critical year for Morgan Stanley, says Richard Bve, an analyst at Punk

When the University of Notre Dame fired football coach Tyrone Willingham for subpar performance, one of the people at the center of the decision was university trustee — and Morgan Stanley chairman and CEO — Philip Purcell. If things do not change soon at Morgan, Purcell could soon find himself facing Willingham's fate.

“This is the critical year for Morgan Stanley,” says Richard Bóve, an analyst at Punk Ziegel, a New York-based investment bank. “If [Purcell] doesn't get matters turned around over there this year, it would be pretty difficult to justify coming back.”

Much has changed since Purcell took over at Morgan in 1997, in the wake of Morgan's acquisition of Dean Witter Discover. At first, his strategy of integrating banking, brokerage and credit-card operations, and of using the firm's retail brokerage operations to distribute in-house financial products, appeared brilliant. By giving reps heavy incentives to push Morgan products, he assured the company would benefit two times over from many transactions. The firm's fortunes soared, peaking in 2000, when shares rose 85 percent.

But times have not been good since then. Morgan shares are off 27 percent since 2001, the worst such showing for any large brokerage stock. True, the investment banking business has revived, but this has not been enough to offset the struggles of the retail brokerage and credit-card units. According to the firm, 60 percent of its profits now come from its institutional business. (The firm declines to break it out, but Bóve estimates that profits from retail are “around a third.”)

A spokesperson at Morgan says, “We are confident that we have the right mix of businesses and are pursuing the right growth strategies for each division.” Still, with regulators now forbidding the sorts of “synergies” that once lay at the core of Morgan's prior success, the firm must chart a new course. Unfortunately it must do so in a most competitive retail brokerage environment.

Morgan's shareholders are testy now, and they are looking for someone to blame for the company's ills. Having taken a 46 percent raise in a year in which his company's stock dropped 8.2 percent, Purcell makes an easy target. It does not help his case that peer firms, including Citigroup and American Express, are making bold moves, such as selling underperforming business assets. Nor is there good news on the regulatory front; Morgan recently was hit with $19 million in SEC fines for charges related to a branch manager in Puerto Rico and a fixed-income manager in New York.

The investor dissatisfaction is embodied by a letter to the firm's board from Scott Sipprelle, a former Morgan investment banking executive and current chairman of hedge fund Copper Arch Capital. Sipprelle called for a complete restructuring — and, potentially, total divesture — of the credit-card and retail business, and, in the absence of a turnaround, called for Purcell's resignation.

Sipprelle, who may be trying to maximize his investment by putting Morgan in play, did not return repeated calls. He wrote that, “the board has abjectly failed to implement a compensation policy that is performance-based, shareholder-aligned, or fair. The franchise has decayed.” A Morgan spokeswoman disputes Sipprelle's claims about decay, pointing out that the firm's net income increased 18 percent in 2004, with revenue up 18 percent and return on equity improving to 16.8 percent.

Purcell, who earned $22 million last year — up about $9 million from 2003, declined to comment for this story. But at an investor meeting in January, he assured shareholders that all was well, dismissing rumors that the firm was considering selling off the Discover business, or even its brokerage arm.

“The thing that would make me change my mind on Discover would have to do with growth,” Purcell said at the meeting. “Our strategy is committed to being in the financial services business with incredible growth opportunities.“

Not all observers characterize Purcell's position as precarious. For instance, one asset manager who has access to Morgan's top executives says Purcell remains firmly in control of the firm. Even Bóve, a consistent Purcell critic, says Purcell is doing what he can.

“A lot of the anger is justified, but it's clear that [Purcell] has recognized the rough areas and is doing what he can to turn them around,” Bóve says. “Personally, I think 2005 will be a breakthrough year for the firm, one that could quiet some of the doubters.”

Morgan advisors contacted for this article are watching closely, and most are adopting a cautiously optimistic stance. “These things tend to shake themselves out,” says one; “We're Morgan Stanley; we'll be fine,” says another.

But as a group, Morgan reps do not appear particularly pleased with their employer. In Registered Rep.'s Annual Broker Report Cards, Morgan placed last among all firms surveyed. Its worst showing was in “strategic focus.”

If change is coming, it cannot arrive too soon, say the reps.

“We can't imagine being sold or anything, but we never imagined being the laggards around here either,” one rep says. “It still feels like everything's in limbo here, which, frankly, is pretty much par for the course.”

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