Morgan Stanley Plans Public Stock Offering : Investment House Will Seek to Sell 20% Stake and Raise $200 Million in Additional Capital
Morgan Stanley & Co., one of Wall Street’s most prestigious investment firms and one of its last three major houses to be privately owned, said Friday that it is planning to sell a portion of its stock to the public.
The move, which many securities professionals had expected, illustrates the impact of changes in the securities markets that have raised firms’ costs and forced them to commit more of their own funds to maintaining their business.
Sources close to Morgan Stanley, which was founded in 1935 when federal laws forced the house of J. P. Morgan to spin off its securities business from its bank, said the firm was planning to sell about 20% of its stock and was hoping to raise $200 million in new capital. That would bring its total capital to about $700 million, raising its rank among all securities firms to seventh from 12th.
Access to Overseas Markets
“This will be an important step in our plans for further growth in the era of global securities markets,” Morgan Chairman S. Parker Gilbert said in a written statement. “It would raise additional permanent capital and, importantly, give us access in the years ahead to the international capital and financing markets.”
Currently, all of Morgan Stanley’s stock is owned by its 114 managing directors, who have voting control over the firm, and 148 principals. None of the present stockholders will sell their shares in the public offering, the firm said.
The new offer is expected to be registered with the Securities and Exchange Commission in mid-February, with the stock actually going on sale two months later.
Morgan’s public offering would be the fifth by a brokerage and investment firm in a year and would follow stock offerings proposed or completed by Bear, Stearns & Co., First Albany Corp., Interstate Securities and Alex. Brown & Sons.
Others May Follow
Among leading investment firms on Wall Street, only Goldman, Sachs & Co. and Drexel Burnham Lambert would remain under entirely private ownership--and many professionals believe that one or both of those firms may follow the others’ lead.
“It wouldn’t surprise me a bit” to see Goldman and Drexel go public, said Nancy Young, a brokerage industry analyst for Cyrus J. Lawrence, a New York investment house. “Both would have to give it serious consideration.”
Executives at both firms were unavailable for comment.
Analysts say now may be an opportune time for Morgan to place its shares.
“The markets are strong, so the firms’ earnings look good and people are inclined to pay a slight premium for their shares,” said Brenda Davis McCoy, a brokerage analyst for the firm of Mabon, Nugent & Co.
Perrin Long, an analyst for Lipper Analytical Services, added that Bear, Stearns’ public offering, in which 25% of the firm was sold for $215 million, was placed on the market at an attractive ratio of 2.47 times its net worth; the stock has since risen in New York Stock Exchange trading to about $26 from the issue price of $21.50. Alex. Brown, a smaller firm based in Baltimore, plans to issue its shares at a ratio of 2.8 times its net worth, according to its prospectus.
The wave of public offerings of brokerage stocks is the first since 1983, when nine firms, mostly smaller or regional brokerages, sold shares. In that case, the outbreak was a bearish indicator, as the stock market turned down over the following 18 months. From the end of 1983 to mid-1985, stock prices generally declined and no brokerages went public.
Morgan has traditionally maintained a fastidious image, eschewing retail business and staffing only eight offices, including four in this country and one each in Tokyo, London, Toronto and Sydney. But in recent years it has moved more aggressively, even entering the “junk bond” underwriting market dominated by Drexel Burnham.
Morgan’s need for capital exemplifies the pressures on securities firms to perform more as principals, rather than as middlemen, in investment transactions.
The interconnections among the American, European and Asian securities markets have raised the cost to firms of participating in the business on a global level. At the same time, the greater importance of institutional customers requires brokers to carry a larger inventory of securities for sale, also making a larger capital position necessary.
“As the markets become increasingly institutionalized and as competition increases for commission revenue,” McCoy said, “firms have to commit more capital just to maintain their market share.”
Moreover, the last decade’s proliferation in security products has forced firms to spread their capital cushions thin to trade in as many instruments as possible. “As the volume and variety of securities grows, you need more capital,” she added.
Morgan Stanley’s capital position has seemed increasingly meager as its leading rivals in the underwriting business have drawn upon the public capital markets to bolster their growth. In 1981, when its capital of $204 million ranked 10th among all securities firms, Morgan Stanley ranked first in underwriting, having managed issues totaling $11.8 billion in volume.
By 1985, the firm had dropped to sixth, managing $12.7 billion in issues. The two leading underwriters last year were Salomon Bros., which managed $34.2 billion in issues and has more than $1 billion in capital, and First Boston Corp., which managed $25.7 billion and has about $875 million in capital. Both are publicly owned.
“So right off the bat, for Morgan Stanley to remain competitive they must increase their capital,” Long said.
