Morgan Stanley CEO Phil Purcell talks to Karina Robinson about growing the business, making changes and that letter from the SEC.
Morgan Stanley is on the hunt for asset management acquisitions in Europe and Japan, says Phil Purcell, chairman and CEO of Morgan Stanley, the investment bank with a market capitalisation of $53bn.
Speaking in a meeting room at the firm’s Broadway offices in New York, Mr Purcell says: “We attracted quite a few assets around the world, in Japan particularly, and we have very successful investment disciplines in Europe and international, but we don’t do a lot in local currencies. If you are going to be a global asset management firm, you would expect to have a bigger presence in euros, for example, so that is a priority for us.”
Growing the overall business in Asia is another goal, both on the institutional side and in consumer businesses. “All those things I have told you are priorities; you can come back in a year and ask about them. If we haven’t done something, there will have been a good reason. So I am not just yack yacking,’’ he says.
Morgan Stanley Investment Management has $394bn of assets under management, up 10% from year-end 2003. It is seeking to convert the improvement in the division’s performance into sales, as it announced in a November presentation. At the time, it also said that one of its priorities for the next 24 months was to “protect/enhance reputation”. It, and the rest of the industry, has certainly suffered some knocks.
Big payouts
A quick recap: in 2002 the bank paid $125m as part of the Wall Street settlement on conflicts of interest in banking and research, albeit less than many of its peers paid. The next year, it paid out $50m in connection with mutual funds sales and disclosure activities. This year, it agreed to pay $54m in a sexual discrimination and bias suit.
Mr Purcell says the 2002 settlement forced Wall Street to take the issues of conflicts seriously. Allied to the Sarbanes-Oxley Act, it made the bank go through its entire organisation, looking at potential conflicts and internal control systems. This has led to a number of changes. “Certainly, the costs are an issue. But I do think there has been a very positive side effect in terms of looking at legacy systems and legacy approaches that you wouldn’t otherwise have looked at and making, in some cases, tiny corrections, in others whole workflow changes that are better for the client and the shareholders,” he says.
The SEC incident
There is a distinct impression that he could let rip at the Securities and Exchange Commission (SEC), but having already been rebuked once (something he believes was unjust and based on misreporting of his words), he is on his guard. The incident happened in spring 2003, when he was reported as saying he did not see anything in the settlement that should concern retail investors about Morgan Stanley. He says he commented – in response to a question about whether the settlement was bad for retail investors – that the settlement was not bad for Morgan Stanley retail investors.
William Donaldson, chairman of the SEC, walloped him with a stinging letter questioning Morgan Stanley’s commitment to the letter and spirit of the law and the high standards of conduct that all investors have a right to expect from their brokerage firms.
Mr Purcell may not look forward to the SEC becoming the firm’s consolidated supervisor, as looks likely. But the father of seven boys is now so cautious about being quoted on anything controversial that he refuses to answer questions on his concerns about the international financial system or say which areas of the bank need work because he believes this will hurt the morale of employees when they read this article. It is difficult to believe that investment bankers have such fragile egos.
Well positioned
Still, it is best not to forget that in the 2004 year to end October, Morgan Stanley stands third in global debt underwriting, second in completed M&A and first in both global initial public offerings and global equity underwriting, according to data gatherer Thomson Financial. It did experience a blip in fixed income sales and trading net revenues in the last reported quarter, but overall net income in the first nine months of 2004 rose to $3286m compared with $2773m in the same period in 2003.
What is evident is that Morgan Stanley’s one-day value-at-risk has been rising steadily from early 2002, when it was just over $40m and now stands at about $80m, according to the bank’s numbers – a mind-boggling rise in a three-year period.
Problem ahead?
The Banker believes there is potential for trouble at Morgan Stanley (and its peers) in terms of its increased dependence on hedge funds. Its exposure to them has increased in the sales and trading it does for them; its increase in proprietary trading, which often involves hedge funds as counterparties; its investments in hedge funds; and finally prime brokerage, which involves providing services to hedge funds, an area that the bank wants to expand further.
Mr Purcell is unconcerned. As hedge funds attract more assets, he expects them to become a more important part of the investment bank’s business. He also believes that if, instead, assets flow out of hedge funds, “the assets will go somewhere. We still have very important relationships with pension funds and mutual funds and other collectors of assets so it is our job to be positioned to wherever they go”.
He also maintains that private equity clients, who are becoming ever more important in M&A (and who he says are highly professional buyers and demanding clients), are paying full fees for the firm’s services. Many investment bankers and professional services firms admit – off-the-record – that private equity clients will not pay top price.
As for the question of competition from banks that have used their balance sheets to win market share in different areas of investment banking, the McKinsey alumnus believes the advantages of a hefty balance sheet have now been neutralised.
“With the development of the credit derivatives market, we, and other banks like us, don’t have to have as big a balance sheet. We compete on lending but, instead of putting the loan on our balance sheet, we sell the credit risk and take it as a profit and loss item instead of a balance sheet item,” he says.
This top-tier “white shoe’’ investment bank sits oddly with second-tier add-ons (the former Dean Witter brokerage and the Discover card) that can distract as much as diversify the core franchise, says Credit Sights, an independent research house.
Not for sale
Although the synergies between the two sides are limited, Morgan Stanley denies it is looking to sell any of those businesses. One can see why.
First, the second tier add-ons seem to be close to Mr Purcell’s heart because he came from that side of the firm and he describes himself as “a leader of a diversified financial company” rather than as a commercial banker or investment banker. And, by all accounts, the CEO rules with a firm hand. Analysts and bankers say that the University of Chicago-MBA is headstrong, does not brook much interference and does not always get along that well with the investment bankers. Critics also say that, while his tight grip on the bank cannot be contested, Mr Purcell lacks any kind of international role such as that played by other senior bankers like Josef Ackermann of Deutsche and Sir John Bond of HSBC.
Second, the unglamorous Discover business provides steady revenue that helps the cost of funds and is somewhat counter-cyclical to the institutional business, says Ray Soifer, of banking consultancy Soifer Consulting. A recent court case means that the card can now be co-branded with banks. Before, Mastercard and Visa had a duopoly and prohibited member banks from offering any cards other than theirs.
This makes the franchise all the more valuable. It also makes Morgan Stanley an attractive target for, say, JPMorgan Chase, with a market capitalisation of $134bn, or Wells Fargo ($106bn) or Wachovia ($84bn), especially as it said in December it will not renew its poison-pill defence when it expires in April 2005.
Predicting US banking consolidation is a thankless task. But, whatever happens, Morgan Stanley will be playing the game.
