More Turmoil at Morgan Stanley

Philip Purcell, CEO of Morgan Stanley, is under fire again. In a shake-up that shocked even observers who said they had seen such an explosion coming, the beleaguered Purcell watched two of his top executives resign in protest of his leadership on Tuesday.

Philip Purcell, CEO of Morgan Stanley, is under fire again. In a shake-up that shocked even those who said they had seen such an explosion coming, the beleaguered Purcell watched two of his top executives resign in protest of his leadership on Tuesday.

The two executives quit when they learned that Purcell was set to name two other executives deemed to be loyal to him to the board of directors. (Purcell was replacing outgoing president Stephan Newhouse and planning to restructure the board.) Rumblings followed that more would quit, and indeed, today, Guru Ramakrishnan, the firm’s head of global trading, resigned.

The latest in an ongoing saga for Purcell, who has been vilified for not selling off the struggling Discover credit-card business; receiving a 45 percent pay increase to $22.5 million in 2004, despite a lagging stock price; and generally ignoring requests from some of the firm’s biggest investors. For example, many of the firm’s investors, led by former Morgan executive Scott Sipprelle, have called for a divestiture of the underperforming Dean Witter segment. Sipprelle even went so far as to call for Purcell’s resignation earlier this year.

Purcell has also attracted attention for popularizing the concept of selling proprietary mutual funds via its own distribution network, an arrangement that puts the interest of the firm and the FA ahead of the interests of the retail client. Morgan paid $50 million in fines for the arrangement, without admitting any of the charges. For more information, see Registered Rep.’s “The House that Purcell Built” in the April 2004 issue. Or visit: http://registeredrep.com/mag/finance_trouble_house_purcell/index.html.

The rift between Purcell and many of his executives and rank-and-file advisors has been going on seemingly since he took over after the merger with Dean Witter in 1997, says Richard Bové, an analyst at Punk Ziegel. Purcell’s tenure has been highlighted by worries about the firm’s stock and continued battles between the old Morgan guard and Dean Witter.

Some say that this restructuring of the board could be the final nail in his coffin.

“I don’t think he’ll be able to recover from this,” says Bové. “There is a point of no return for everything in life, and I think this has gone beyond its point of no return. You reach a point where you hurt a firm enough that you cannot continue.”

The turmoil surrounding Purcell has spooked even some of the firm’s top producers. “There are two different schools of thought. Some people think [Purcell is] the smartest guy in the world and has done so much for our company. Other people are frustrated that the stock hasn’t done that well,” says one. “You get 10 advisors together and they will argue. Maybe we would be more marketable if they spun us off. They’d have to pay us more to stay if they spun us off. Who knows if it’s really true or whether there will be more departures. But this is just the beginning. I think there will be more news to come and more headlines.”

Those complaints, and Purcell’s response to them, came to a head Tuesday. This recent upheaval started when Purcell named Zoe Cruz and Stephen Crawford co-presidents of the firm late Monday night The response to the announcement was immediate, and furious. Eight former Morgan executives (and current shareholders), including former president Robert Scott, who had written a letter in early March blasting Purcell’s leadership, released a statement saying, “This ‘restructuring’ is not responsive to the concerns expressed in our letter and, we believe, is not in the best interest of Morgan Stanley shareholders.” They also predicted widespread resignations.

It didn’t take long for them to be proven correct. The next day, institutional securities president Vikram Pandit and institutional equities head John Havens resigned (reportedly to a standing ovation upon leaving the building). They were followed out the door by Ramakrishnan. (According to The New York Post, Newhouse has since resigned, though Morgan Stanley spokespeople could not confirm that.)

Observers and insiders are quick to point out that the recent uproar has little to do with Cruz or Crawford, who, after all, are from the Morgan Stanley arm, not the Dean Witter arm. Instead, the concern is that widespread changes were needed at Morgan, and the promotions were seen as putting a band-aid on a gaping wound.

“They were upset because they wanted a more dramatic change,” Bové says. “They were looking for massive change within the company, selling Discover card, selling the retail sales operation, something like that. What they got was minor change; change that didn’t mean anything.”

After all, the real complaint, as usually tends to be the case, is money—specifically, the stock price. It has fallen 34 percent since 2000, as opposed to the average of 16 percent for other securities firms since then. It fell even more Tuesday before rebounding slightly Wednesday. “The stock is still selling at half the price it held five years ago,” Bové says. “You can explain away doing poorly if everyone else is doing poorly, but you can’t if everyone else is doing reasonably well.”

Some say the influence of the renegade investors is overstated, that they are a minority within the firm. “I think it’s just the guys who left who are angry,” says one top producer. “There's a laundry list of people who were pushed out—maybe 20 to 50 management people—and some of these management people hold a lot of stock. There are lots of people who were disgruntled and went to Bank of America. Whether they can really make a difference depends on how strongly they feel about it and whether they band together. “

But Bové says the only possible way Purcell could remain at the reins is an old-fashioned one: Keep the stock price up. “The board is his board, and it will do whatever he wants,” he says. “He has about a year. Each quarter has to be a good quarter. He can’t have a bad quarter.”

The upheaval is also expected to affect the firm’s recruiting efforts, which have increased in recent months. Observers say any candidates that come to the firm will likely be hesitant to sign on until the management Tilt-a-Whirl has settled. “I’m wary of directing too many people over there, until this whole mess straightens out,” says one recruiter.

That’s particularly true considering concerns that the certain sections of the firm will be spun off, which is precisely what many shareholders have been begging for. “We’re totally positioned to be sold, the way they’ve structured our business,” says one top Morgan advisor. “They really have us broken out in tiers of productivity. They know whom they have to retain. The building in Westchester is ready to go. You can see the way they’ve sliced it out. All of the research analysts on Wall Street are saying, ‘Why don't they spin it off? Why not that and the Discover Card business?’ But whenever I ask Purcell, and I've asked him personally, he says no, no, no, we’re better as a unified company. We’ll see.”

Kristen French contributed to this report.

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