Morgan Stanley may mimic Citi-Legg

New CEO says swap raises question whether its funds should be sold

July 02, 2005|By BLOOMBERG NEWS

NEW YORK - Morgan Stanley Chief Executive Officer John J. Mack may consider selling the company's asset-management business as he takes over the world's largest securities firm that he helped create eight years ago.

Mack told analysts during a conference call Thursday that Citigroup Inc.'s announced sale of its fund unit to Legg Mason Inc. may be worth mimicking.

"You have to question now your ability to gather assets with your own in-house funds, so that right there is a strategic question," he said.

Citigroup Inc. agreed June 24 to sell its similarly sized fund unit in exchange for Legg Mason's brokerage unit, plus about $2 billion in cash and stock.

"I don't know if that's the right or wrong decision, but certainly it is the right question," Mack said of the Citigroup transaction with the Baltimore company.

Morgan Stanley's fund division, which oversees $416 billion, had pretax income of $175 million in the second quarter, down 16 percent from a year earlier.

"I'm not quite sure what they're going to do with the asset management business," said Brian M. Barish of Cambiar Investors in Denver, which holds 2 million Morgan Stanley shares among the $4.3 billion it manages. "Maybe they try to fix it themselves, or perhaps they sell it."

Michael McKeon, head of the financial consulting practice at Booz Allen Hamilton Inc. in New York, said Mack must "reconcile the mix of businesses that Morgan Stanley has and answer for how they make sense together."

Mack, 60, is returning to Morgan Stanley four years after he stepped down as president to replace the embattled Philip J. Purcell. The board brought him back after earnings and the stock trailed rivals including Goldman Sachs Group Inc.

More than 55 top managers left the New York firm in the past three months. In May, a Florida court ruled that Morgan Stanley pay $1.4 billion in a fraud suit brought by investor Ronald O. Perelman.

One of Purcell's last decisions was proposing to spin off the Discover credit-card unit, which has about $47 billion in loans. Mack said Thursday that he needed "to be brought up to speed" on Discover.

"It would make sense for them to sell Discover," said Rupert Della-Porta, head of U.S. stocks at London's F&C Asset Management PLC, who sold his Morgan Stanley shares six weeks ago. "They also may decide to sell the asset management business."

Mack, who spent 29 years at the firm, helped sell Morgan Stanley to Dean Witter, Discover & Co. for $10.4 billion in 1997, creating a company that sells everything from credit cards to junk bonds.

Mack yielded the top job to Dean Witter's Purcell to ensure that the deal would be completed, and left four years later when Purcell refused to step aside and make him CEO.

"He had a hand in assembling the stuff that's there, but it may be time to rethink it," said Victor G. Caruso, a partner at Gordian Group LLC, a financial services firm in New York that specializes in mergers and restructuring. "He is a very aggressive-deal kind of guy."

Morgan Stanley is the only one of the five largest independent securities firms to earn less than it did five years ago, and its stock is down 40 percent since Purcell drove Mack out in January 2001.

Shares of Morgan Stanley rose 56 cents to close at $53.03.

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