John Mack, the rumored favorite of Morgan Stanley's board for the CEO slot, could be a blessing for the firm's retail brokers if he gets the job. And that's looking more and more likely, with news reports citing sources close to the talks. Though Mack has a reputation for vigorous cost-cutting, he has spoken out in favor of keeping the 1997 merger of the Morgan Stanley investment bank and retail Dean Witter intact as recently as a week before current CEO Phillip Purcell stepped down. As president of Morgan Stanley, Mack helped Purcell engineer the marriage of the two companies before being muscled out in a power struggle with Purcell.
"It is just a question of making sure that the merger fits together, is managed properly," he said in a CNBC interview in early June. "We were convinced [the merger] made a lot of sense...and I'm still convinced it made sense."
That said, opinions about the future of Morgan Stanley have been changing rapidly over the past few weeks. Morgan Stanley declined to comment on the rumored talks with Mack, but his hiring would be something of an about-face for the board. The lead director in charge of the successor search, Charles Knight, said the board would not consider Mack or any recently departed executives for the top job when Purcell announced his resignation a few weeks ago. The board quickly faced sharp criticism from shareholders and from some within the firm for those declarations.
And now they seem to think Mack might be the best person to unite the different factions at the firm and put it back on track. Punk Ziegel analyst Dick Bove notes that Mack has a long record of achievement at Morgan Stanley and is popular both with the Morgan and probably also the Dean Witter camps. "Thus, of all the potential candidates, he is most likely to be the one who can pull the company together most rapidly," Bove says.
Mack "the Knife" earned his nickname at Credit Suisse First Boston, where he became CEO just months after leaving Morgan Stanley in 2001. Within a year, he cut 4,500 jobs, renegotiated swollen pay packages, settled important regulatory issues and turned around CSFB's investment banking unit. He was ousted CSFB last year and is currently chairman of Pequot Capital Management, a hedge fund.
One senior broker said he would be thrilled if Mack replaced Purcell. "Everybody here when [Mack] left was disappointed," he said. "He had a strong reputation. What worries us retail guys most is whether they get rid of retail. And evidently he was kind of similar in Purcell's vein. He was a big impetus behind the merger, so everybody is pretty excited around here," he said.
Still, Mack would need to turn things around quick. Purcell, who was the primary architect of the merger, announced he would step down no later than next April, after suffering fierce attacks from shareholders for weak performance at the retail brokerage and his failure to make the merger work. The so-called group of eight-a group of dissident shareholders and former Morgan executives-were long calling for Purcell's head, and have said they want the merger undone, with the Dean Witter retail brokerage sold or spun off.
In the first quarter, Morgan Stanley's retail brokerage unit, called the Individual Investor Group (IIG), generated pre-tax margins of 15 percent, compared with 20 percent at most of its peers. And last year, it produced about 19 percent of Morgan's revenue and just under six percent of its pretax profits.
A Purcell successor wanting to keep the retail brokerage unit would have to improve its financials in short order, said Sandler O'Neill & Partners analyst Jeffrey Harte. "They would have to do more client segmentation and expand the retail product offering to get a better wallet share of clients," he added. "They're doing the right things now, but a lot of their competitors did the right things years ago."
One former Morgan broker who still has ties to the firm speculated that Mack might try to pick off the top retail brokers and integrate them with the private wealth management unit on the Morgan Stanley side, spinning off or selling the rest of retail. "If they wanted to really get back to a Goldman Sachs, Lehman type of situation-with fewer salesmen, more high-net-worth focused, then that would be the way of going about it," he said.
For Mack, a crucial point in negotiations over the job will be the composition of the Morgan Stanley board. Of thirteen directors on the board, seven supported Purcell over Mack in 2001 in the power struggle that cost Mack his job.
Other names that have surfaced as possible choices for CEO include Laurence D. Fink, the chief executive of BlackRock, and Robert E. Diamond Jr., president of Barclays. Fink reportedly has already turned down the job.