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In January, hundreds of friends and colleagues of Richard Fisher gathered to remember the former Morgan Stanley CEO who helped bring together Morgan and Dean Witter in their historic 1997 merger. Fisher, who died from prostate cancer, had been so determined to make the companies' marriage work that he even agreed to step aside and let Philip Purcell, Dean Witter's CEO at the time, run the combined company. The memorial service was intended to honor the man, but many of those present were in no mood to honor his mission.
In fact, the first stirrings of the battle that's now ripping apart the House of Morgan can be traced to that day. By many accounts, several former Morgan execs started grumbling about the way the company was being run by Purcell, and at the service began plotting a revolt. The men--all former top executives who remain big shareholders--were unhappy about the foundering stock price, and they didn't like Purcell's style, particularly at the memorial. He caused a stir by rushing with New York City Mayor Mike Bloomberg to pay respects before others to Fisher's widow. "People were just rolling their eyes," says one person in attendance. Some also asked around about why Morgan's current board members, who are Purcell's biggest allies, weren't there. They were all invited, but one of Purcell's lieutenants said they weren't coming, and gave no explanation (his critics believe Purcell didn't want the board to hear the gripes).
The feelings hardened into a resolution to oust Purcell, no matter what the cost. They gathered again, dubbed themselves the "Group of Eight," and started attacking Purcell and his leadership. With their vast network of Wall Street contacts, the dissidents got the attention of big investors. That's triggered a wave of defections of some of Morgan's top talent. Even some within Purcell's inner circle now concede that his days could be numbered. But Purcell can claim some victories, too--he does remain in control (though the pressure has led the board to consider splitting his job of chairman and CEO in two, NEWSWEEK has learned). He's also planning a counterattack, including possibly making his own case to the media and suing the Group of Eight for "torturous interference." Torturous or not, the interference isn't likely to end soon. One member, Richard Debs, former head of Morgan's international division, has said the group is willing to spend the next year turning the screws on Purcell. Still, what's becoming clear is that more may be lost in the battle than will ever be won.
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The biggest loser? Perhaps Morgan Stanley itself. The stock is down about 15 percent from its recent high, in part because many of its best brains are quickly draining away. Vikram Pandit, the head of institutional securities, was fired when Purcell decided to oust those who didn't support him. Last week some top stock traders left. Morale is low, and Purcell is resorting to paying retention bonuses and writing memos to rally his troops. "Times like this bring out the very best in our people," he wrote last Friday to staff in a memo obtained by NEWSWEEK. "There undoubtedly will be further challenges in the weeks ahead."
One reason no clear victor may emerge from this fight is that neither side can make a particularly compelling case for why they're better than their opponents. For the Group of Eight, there is the small matter of credibility--they backed Purcell during good times and have turned on him because the stock price is down from the boom-era high of about $100 (it's now trading at about $50). They're having trouble convincing big shareholders that their plan is better. "There's no coherent plan from either side," said Anton Schutz of Burnham Asset Management, who manages 95,000 Morgan shares. Many investors said the group's recent presentation by Robert Scott--the No. 2 exec at Morgan before Purcell fired him in 2003--sounded too much like a personal fight because of his constant criticism of Purcell and lack of specifics on how to fix the firm. In fact, a spokesman for the group says Scott, who originally argued that he should replace Purcell, is now open to having someone else fill the top job if Purcell leaves.
The Group of Eight, called the "Grumpy Old Men" by some, hope their biggest leverage will come from legislation. The Sarbanes-Oxley law makes it more difficult for board members to ignore dissident shareholders. So if the brain drain continues, Morgan directors may worry that they'll be held liable for supporting Purcell while the firm is hollowed out. "Boards are no longer locked up," said Robert Greenhill, a former top banker at Morgan who's advising the Group of Eight. Greenhill and his cohorts are putting heavy pressure on board member Laura Tyson, a former Clinton economic adviser and current dean of the London Business School (she's a holdover from the premerger Morgan board). Tyson didn't return a call for comment.
There are even battles over severances. Many on Wall Street have speculated that three recently departed top executives, including Pandit, haven't joined another firm because they believe Purcell will leave Morgan soon and they can return to work. But that's only part of the story. Morgan has been slow in handing the executives their "exit agreements," which include additional money the firm will owe them for work completed so far this year. Until these deals are completed, they can't go anywhere. A former Morgan exec says Pandit told him that Purcell was "jerking him around." Pandit couldn't be reached.
Many critics acknowledge that Purcell, 61, has a good chance of holding on since the loyalties of his directors may even trump the pressure of Sarbanes-Oxley. "I think people don't realize how much control he has over the board," John Mack, Purcell's former No. 2 who was ousted four years ago after he demanded the CEO job, recently told one Wall Street executive. Mack, who last year stepped down as CEO of Credit Suisse First Boston, is an obvious candidate to return to run Morgan. But he's said he wouldn't want the job if it became open, though it would make a "great ending to the book."
If Purcell manages to survive, many expect him to sell the company. After all, its falling stock has made it something of a bargain. Possible suitors include HSBC, the massive Hong Kong-based bank, and JPMorgan Chase (that would reunite the "House of Morgan," which was separated because of a Depression-era banking law, since overturned). If Morgan is eventually absorbed by another firm, perhaps current and former executives will gather someday to recall Morgan's better days, and reflect on what their battles ultimately cost them.
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