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 Merger

The origin of the merger can be traced back to 1995, when Morgan Stanley played a major role in the spin-off of Dean Witter Discover from Sears Roebuck & Company. Initially, Morgan Stanley considered a joint venture but later thought about a merger.

However, the negotiations with Dean Witter made no headway. By the end of 1996, it was widely believed that NationsBank would be buying Boatmen's Bancshares and Citicorp was negotiating with American Express. These events pressured Morgan Stanley into seriously considering a merger with Dean Witter. In December 1996, Purcell invited Richard B. Fisher (Fisher), CEO of Morgan Stanley, and Mack, President of Morgan Stanley, for negotiations. After two months, the final deal emerged. Dean Witter was to acquire Morgan Stanley through an all stock deal, after which the shareholders of Morgan Stanley would own 45% of the combined entity. The ticker symbol would become MWD, a combination of Morgan Stanley's MS and Dean Witter's DWD...

Post Merger Devolopments

Defying the analysis of industry experts, the merger delivered positive results during the first three to four years. When the revenues for 1998 were considered, Morgan Stanley Dean Witter ranked tenth among the major financial services companies in the US. The company was ranked sixth in profits and topped the list as far as profit as a percentage of shareholders'equity was considered (Refer to Table II for details of Morgan Stanley Vs Competitors).

In the third quarter of 1998, the fixed income trading operations of Morgan Stanley were integrated with that of Dean Witter. The Dean Witter traders were sent to Morgan Stanley and the traders from Morgan Stanley made their displeasure about working with Dean Witter obvious. At the same time, Morgan Stanley's underwriting and trading departments and Dean Witter's retail brokerage department were asked to work together. In the retail preferreds business, Morgan Stanley and Dean Witter had a share of 1% each in 1996. Retail preferreds were securities priced below US$ 25 per share, a segment which primarily catered to small investors...

The Troubles Begin

In the third quarter of 2000, for the first time since the merger, Morgan Stanley Dean Witter missed the earnings estimates for two consecutive quarters. The reasons were many including lack of good IPOs and debt issues and the NASDAQ falling by 45%. According to the analysts, the US economy had started slowing down in 2000...

Cultural Differences Persist

Purcell did not consider that cultural differences could be a major hindrance to the success of the merger. After the merger was announced, he said, "I think it's a mistake to spend too much time agonizing over cultural differences. They do exist, and when two companies merge, you've got to be aware of them and deal with them.

An important part of leadership is simply picking the right people and then giving them the freedom they need to run our various businesses. To do that, you've got to make sure you establish a great deal of trust and mutual respect." Purcell's belief notwithstanding, there were significant cultural differences between the two companies...

The Slow Down

In 2001, the US economy was witnessing a major slowdown. The market for IPOs and mergers and acquisitions dropped considerably compared to 2000. Globally, the M&A activity was down by 51% to US$ 918 billion compared to US$ 1891 billion in 2000. The IPO activity also witnessed a downturn by 57% with 91 IPOs raising US$ 41.25 billion in 2001 against 441 IPOs raising US$ 108.15 billion in 2000...

Governance Problems

While Morgan Stanley was performing badly in the early 2000s, Purcell concentrated on strengthening his position in the company. When Morgan Stanley's loyalists like Fisher retired from the board, Purcell brought in several of his old associates and friends from Sears and the erstwhile Dean Witter Discover. After the internal power struggle, in January 2001, Mack left amidst rumors that his departure had been forced by Purcell with the support of the company's board. In the next couple of years, Morgan Stanley became involved in several legal issues and under Purcell's reign, it became one of the least compliant securities firms (Refer to Table III for details of some of the legal problems the company faced)...

The Challenges

Mack had several challenges ahead of him. On the challenges he faced, Fortune wrote, "So his top priority must be to resolve the long-festering culture clash - dating from the 1997 Morgan-Dean Witter merger - that contributed to the downfall of predecessor Phil Purcell. He also needs to revive several important operations, including a stagnant Discover card business, a disappointing brokerage arm, and a lagging asset-management unit..."...


Exhibit I: Morgan Stanley Dean Witter - Top Management (1997)
Exhibit II: Morgan Stanley -- Financial Performance (1997-2000)
Exhibit III: Morgan Stanley - Share Price Chart (1997-2000)
Exhibit IV: Morgan Stanley -- Financial Performance (2001-05)
Exhibit V: Morgan Stanley - Share Price Chart (2000-2005)
Exhibit VI: Morgan Stanley - Board of Directors (2005)

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