Abstract:

The case discusses the merger of one of the

largest investment banks in the US - Morgan
Stanley with Dean Witter, Discover & Company,
a retail firm specializing in stock brokerage, asset
management and credit cards in 1997. Though
analysts raised doubts about the success of the
merger, initially the merger proved to be
successful placing Morgan Stanley Dean Witter
among the top investment banking and financial
services companies. However, in the early 2000s,
with the slowdown in the US economy, the
merged entity reported declining revenues and
profits and exodus of key top management
personnel. The then CEO of Morgan Stanley
Dean Witter, Phil Purcell forced out President &
COO John Mack in 2001.
By 2005, Morgan Stanley was embroiled in governance and legal problems, which affected its
business performance and financial position. A group of eight former executives of Morgan
Stanley campaigned against Purcell leading to its ouster in June 2005. This case illustrates the
role of top management and good governance in the success/failure of a merger.  

Issues:
» Examine the synergies of merger between Morgan Stanley and Dean Witter
» Understand the reasons for the success of Morgan Stanley Dean Witter merger during its
initial years
» Study the role of top management in the success of a merger
» Examine the nature of governance issues affecting the business performance of Morgan
Stanley Dean Witter merger

Contents:
  Page No.

A Mega Merger 1

Background Note 2

The Merger 4

Post Merger Devolopments 6

The Troubles Begin 7

Cultural Differences Persist 7

The Slow Down 8

Governance Problems 9

The Challenges 11

Exhibits 13

Keywords:
Morgan Stanley. , Dean Witter, Discover & Company., Mergers and Acquisitions, Philip J
Purcell, Business Segments, Cultural Problems, Governance, Legal Problems, Group of Eight,
Merger Integration

The Morgan Stanley - Dean Witter Merger - Next Page>>

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"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." 1

- 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." 2

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

A Mega Merger
On June 20, 2005, Morgan Stanley & Company (Morgan Stanley),3 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.

The Morgan Stanley - Dean Witter Merger - Next Page>>

A Mega Merger Contd...

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."5

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.

Background Note
Morgan Stanley

Morgan Stanley was founded in 1935 as an

investment bank by Henry Morgan and Harold
Stanley, former employees of JP Morgan,6 after
the Glass Steagall Act,7 which prevented financial
institutions in the US from carrying out both
commercial and investment banking activities,
came into force.

To comply with the Act, JP Morgan & Company

had to split its securities and commercial banking
businesses and this led to the establishment of
Morgan Stanley as a separate entity...
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...
EXCERPTS Contd...

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
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).