The end of Purcell's troubled reign

Jun 13th 2005
From The Economist Global Agenda

Philip Purcell, the embattled chief executive of Morgan Stanley, is to quit following a blistering campaign against him by former executives of the investment bank. His downfall may presage the unravelling of Morgan Stanley’s merger with Dean Witter, which has mired the combined firm in culture clashes since the day they united

PUBLICISTS for merging companies often like to talk of a “merger of equals”, implying that there will be no winners or losers in the new firm, no conquerors or conquered—just happy co-workers. In practice, this sort of blissful union is rarer than hen’s teeth. The 1997 merger between Morgan Stanley, an aristocratic Wall Street investment bank, and Dean Witter, a proletarian retail brokerage, was typical in both the glowing rhetoric about harmonious fusion and the quick domination of one firm by the other that followed.

In the case of Morgan Stanley Dean Witter, it was a dictatorship of the proletariat, led by Philip Purcell, the former head of Dean Witter, who took the helm of the combined firm. Mr Purcell rapidly consolidated his power and by 2001 had pushed out John Mack, the former Morgan Stanley chief, even though he was widely believed to have been promised that the chief executive’s job would be passed to him within a few years, to get him to agree the merger terms. Since then, critics charge that Mr Purcell has surrounded himself with Dean Witter loyalists, making the investment bankers—who generate the bulk of the profits—into distinctly second-class citizens of the Morgan Stanley empire.

In recent months Mr Purcell has suffered a blistering campaign to unseat him, led by the “group of eight”, a collection of former Morgan Stanley investment bankers, now shareholders, while the bank itself has suffered waves of defections among senior staff. And, on Monday June 13th, Mr Purcell gave in to the pressure from his critics and announced that he would be stepping down as chief executive as soon as a replacement was found.

The group of eight stepped up its campaign against Mr Purcell after he announced in March that he was promoting two of his supporters, Stephen Crawford and Zoe Cruz, to co-presidents, putting them in line for the succession—and thereby triggering the exodus of five members of the management committee. The dissident group has been pushing a plan that would essentially undo the 1997 merger, unshackling Morgan Stanley’s world-class securities business from Dean Witter’s mediocre retail brokerage, its lacklustre mutual-fund line and its disappointing credit-card business, Discover, which has steadily lost market share.

Until the past weekend, Mr Purcell enjoyed the support of Morgan Stanley’s board. They rejected most of the group of eight’s proposals, though they did agree to sell off the credit-card business. Undeterred, the rebels took their battle public, buying full-page newspaper advertisements to convince shareholders that their plan could unlock hidden value in the bank’s shares, which have performed poorly in the past five years (see chart above). As institutional investors climbed aboard the bandwagon, pressure on the bank’s board increased, and the company’s stock price seemed to become directly correlated with the probability that Mr Purcell would leave his job.

Shareholder pressure may not be the only factor involved in Mr Purcell’s departure. On May 3rd, Morgan Stanley disclosed that it had found e-mails previously said to have been destroyed in the September 11th 2001 attacks on the World Trade Centre, where Morgan Stanley had offices. Many of its competitors have suffered harsh penalties over various financial scandals following the discovery of incriminating e-mails but no such damning evidence had come to light in Morgan Stanley's case. The sudden rediscovery of missing messages has proved embarrassing to Mr Purcell, who had previously gloated about his firm’s luck. It has also brought unwelcome attention from the Securities and Exchange Commission.

More pressingly, Morgan Stanley is haemorrhaging talent. Since the departure of the management-committee members, ever more investment bankers have joined the conga line flowing down Broadway to the bank’s competitors. On Friday, a nine-person team from the bank’s equity-derivatives group defected to Wachovia, an ambitious rival which is trying to build its stock business. Equity derivatives has recently been one of Morgan Stanley’s most successful businesses, and the loss of its team may well have been the final straw as regards the board’s support of Mr Purcell. The board will also have been dismayed at Morgan Stanley's weak financial performance: on Monday, the bank gave a warning that its second-quarter earnings will be as much as 20% below the equivalent figure for 2004, and well below what stockmarket analysts had expected.

The plain-speaking Mr Purcell has not tried to sugar-coat the reasons for his departure with talk about “spending more time with my family” or “seeking new opportunities”. The second sentence of his letter of resignation reads: “It has become clear that in light of the continuing personal attacks on me, and the unprecedented level of negative attention our Firm—and each of you—has had to endure, that this is the best thing I can do for you, our clients and our shareholders.” So far, the market seems to agree; Morgan Stanley’s shares opened on Monday morning at $51.76, up sharply from their $49.88 close on Friday. Stockmarket analysts, like the group of eight, seem to be hoping that his departure will mean the sale of Dean Witter’s assets and Morgan Stanley’s return to being run by its investment-banking aristocrats. It would not be the first time that a dictatorship of the proletariat proved to be short-lived.

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