Time May Be Right for Morgan Stanley
By THOROLD BARKER
It isn’t the obvious time for Morgan Stanley to make an acquisition that will see billions of dollars flow out the door. Months ago its shares were in freefall and it was forced to take $10 billion of capital from the U.S. government. Using some of that to buy control of a merged brokerage operation that incorporates Citigroup’s Smith Barney could raise eyebrows.
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But the planned deal gives a taste of how Wall Street might emerge from the credit crunch. Morgan Stanley would pay several billion dollars for a controlling stake in what would become the country’s biggest operation by number of brokers. Assuming Morgan could buy full control at a later date, it would be diversifying away from its hefty exposure to the risky, capital-intensive trading businesses that mushroomed during the boom. The brokerage business is more stable, client-focused and needs less capital.
A risk is that markets remain stressed and clients continue to hunker down, squeezing brokerage cash flows. Also, the integration could create instability, if the best-performing brokers go elsewhere. Ironically, that’s something Citi’s aware of. Integration challenges were one reason for excluding Wachovia’s brokerage arm from Citi’s proposed deal to buy the bank last year.
But, after CEO John Mack’s attempt to take on more risk during the boom, a brokerage deal would redirect Morgan Stanley towards the more pedestrian model of the old Merrill Lynch — before it got itself into trouble and sold to Bank of America. Then, the outstanding question for Wall Street would be how Goldman Sachs responds strategically to the new realities.
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