Return of the Mack

Jul 1st 2005
From The Economist Global Agenda

Following the resignation of Philip Purcell as boss of Morgan Stanley, the board has picked John Mack, his former arch-rival, to run the Wall Street firm. Mr Mack will probably be able to quell the turmoil that has engulfed the bank, but that will still leave him facing some daunting strategic challenges

IF REVENGE is a dish best served cold, John Mack must be enjoying a rare epicurean delight. Mr Mack, the former president of Morgan Stanley, was the driving force behind the 1997 merger between his aristocratic Wall Street investment bank and the distinctly proletarian Dean Witter brokerage. In order to make the merger go through, he agreed to let Philip Purcell, then the head of Dean Witter, assume the top spot in the unified firm—with the proviso, it is widely believed, that he step aside in a few years to let Mr Mack have the job. When Mr Mack pressed him to make good on this deal, he set off a power struggle that ultimately resulted in Mr Mack’s departure in 2001.

On Thursday June 30th, the board announced that it had asked Mr Mack to return to the firm as chairman and chief executive. This was the culmination of a months-long battle between Mr Purcell and a coterie of former Morgan Stanley bankers, known as the “group of eight”, who waged a fierce public battle to unseat him after he engineered a management shake-up that resulted in the departure of a number of senior executives.

Mr Purcell’s tenure was plagued by disappointing performance, a lingering rift between the Morgan Stanley and Dean Witter bits of the firm and, recently, embarrassing legal problems. The board supported him through months of agitation by the group of eight and high-profile staff defections. But as the controversy fed on itself, institutional investors got on the anti-Purcell bandwagon, and the share price increasingly seemed to be correlated with the likelihood of Mr Purcell’s exit. Ultimately, he and his loyal board were unable to withstand the combined pressure of employee and investor discontent. On June 13th, as Morgan Stanley prepared to release second-quarter results well below expectations, Mr Purcell announced that he would be stepping down.

Charles Knight, the board member in charge of the succession search, quickly announced that he would not consider any of the members of the anti-Purcell camp—including Mr Mack. However, the board was forced to abandon this position as it became clear that Mr Mack was a popular choice with both investors and staff. Since rumours of his candidacy surfaced last week, Morgan Stanley’s stock has traded higher, and there are reports that morale is improving at the battered firm. The implication that the board backed the wrong horse in the first place must be embarrassing to Mr Purcell—and deeply satisfying to Mr Mack.

The move has been widely hailed as a good one, even by other candidates for the job—one of them, Laurence Fink, boss of fund manager BlackRock, even told Mr Knight he was “crazy” to be talking to him, not Mr Mack, according to the Wall Street Journal. By putting a former insider in charge, the board has avoided a prolonged transition during a period of uncertainty. Mr Mack is viewed as a charismatic leader, at a time when restoring morale and halting defections are critical.

Even more importantly, now that Mr Mack is in charge, he must settle the strategic future of the firm. The Dean Witter merger was undertaken with the aim of creating a one-stop shop for financial services, but so far no dazzling synergies have emerged. The securities business currently provides the bulk of the firm’s profits, while the brokerage and credit-card sides are lagging. Even before Mr Purcell stepped down, many thought that Morgan Stanley should jettison much of the Dean Witter empire, particularly the Discover Card division—and shortly before his departure he began bowing to this pressure, announcing that Discover would be sold. Mr Mack must decide whether to return the firm to its profitable roots as a high-end purveyor of services to wealthy individuals and corporations, or pursue the dream of being all things to all people—and if he chooses the latter, which businesses advance that goal.

But before he can do any of these things, he will have to make decisions about staffing that are bound to be unpopular in some quarters. Many of his boosters are hoping that he will bring back the executives who left during or after Mr Purcell’s controversial shake-up. But this may not work while Stephen Crawford and Zoe Cruz—whose appointment triggered the exodus—retain a prominent role at the firm. On Thursday both resigned their board seats, but they remain co-presidents. Mr Mack will find that there is no easy way to put the firm back the way it was before March.

He also faces a tough task in solidifying his support on the board, which is filled with Mr Purcell’s backers. The directors may have agreed to place Mr Mack at the helm, but many of them did so reluctantly. Fully aware of this, Mr Mack wisely chose to say little about his plans for personnel or strategic changes while the board was considering its decision. That will have to change, though—and quickly. Now Mr Mack will have to prove that he is, in fact, the better man for the job.

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