The Morgan Stanley - Dean Witter Merger

The Morgan Stanley - Dean Witter Merger
Case Code: BSTR209
Case Length: 19 Pages
Period: 1997-2005
Pub Date: 2006
Teaching Note: Not Available
Price: Rs.400
Organization: Morgan Stanley & Company, Dean Witter
Industry: Banking & Financial Services
Countries: India
Themes: Mergers, Acquisitions, Strategic Alliances
The Morgan Stanley - Dean Witter Merger
Abstract Case Intro 1 Case Intro 2 Excerpts

"The combination of Morgan Stanley and Dean Witter, Discover may be as close to an ideal merger as there is, it is based on powerful franchises, high profitability and opportunities for accelerated growth."

- Philip J. Purcell, 1997.

"This is the last nail in the coffin on the failed vision of the financial supermarket, Dean Witter and Morgan Stanley, these pieces never fit together and stapling them together wasn't the answer."

- Jeffrey A. Sonnenfeld, Associate Dean, Yale School of Management, 2005.

A Mega Merger

On June 20, 2005, Morgan Stanley & Company (Morgan Stanley), one of the world's largest diversified financial services companies, announced that John Mack (Mack) would rejoin as Chairman and CEO of the company.

Mack was brought back on the demand of employees and institutional investors after Philip J Purcell (Purcell), the erstwhile CEO and Chairman of the company, announced his retirement on June 13, 2005. The reasons for Purcell's exit were the widely publicized governance issues and his failure to reap the full benefits of the much hyped merger between Morgan Stanley and Dean Witter, Discover & Company (Dean Witter). On Mack's return, BusinessWeek said, "Mack's return to Morgan Stanley would mark one of the greatest comebacks in Wall Street history."4 The merger between Morgan Stanley and Dean Witter was announced in February 1997 and the entire exercise was completed on May 31, 1997, to form Morgan Stanley, Dean Witter, Discover & Company (Morgan Stanley Dean Witter).

This merger was the first such in the global financial services industry. The merged entity was a market leader in securities, asset management, and credit services, had a market capitalization of US$ 21 billion and assets under management at US$ 270 billion in mid-1997. As per the agreement, one share of Morgan Stanley was exchanged for 1.65 shares of Dean Witter.

The merged entity was expected to benefit significantly since Morgan Stanley had an established range of corporate finance & investment banking products while Dean Witter had a strong distribution network. Morgan Stanley Dean Witter was to offer a range of products and services to clients at a low cost.

The merger was expected to bring in revenues from businesses such as retail brokerage, asset management, and credit cards.

Purcell from Dean Witter assumed charge as CEO of the merged entity, while Mack from Morgan Stanley was the President and Chief Operating Officer.

After the merger, Purcell and Mack announced, "The combination of these three powerful and distinctive brands will create a global powerhouse with unmatched origination and distribution skills and a unique balance between institutional and individual investor capabilities."

The stock markets reacted positively to the news. On the day the merger was announced, the Morgan Stanley stock rose by 14% to US$ 65.25 and that of Dean Witter by 5% to US$ 40.62. Ten months after the merger, the name 'Discover' was dropped and the company was called Morgan Stanley Dean Witter. Initially, the merger seemed to be successful. However, there were glaring differences between Morgan Stanley and Dean Witter, especially on the culture front, and these persisted. A few years after the merger, differences between Purcell and Mack came to light and this led to the ouster of Mack in 2001. The merged company could not escape the bear run in the market in the early 2000s.

The total revenues of the company dropped from US$ 44.99 billion in 2000 to US$ 32.93 billion by 2002. Net revenues dropped from US$ 25.99 billion to US$ 19.07 billion during the same period. Purcell was also criticized for his management practices, which had led to the exodus of several key executives from Morgan Stanley. These events culminated in Mack returning to the company in 2005, replacing Purcell.

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