The unmistakable message in the surprise marriage plans between Morgan Stanley & Co. and Dean Witter, Discover & Co. is that the individual investor is king--and if you’re going to serve the king, you’d better have some high-quality goods and services to offer.
The Morgan/Dean Witter merger proposed Wednesday would unite Morgan’s sterling talent in stock and bond underwriting and market analysis with Dean Witter’s huge sales force, finally giving those brokers marquee-name deals, stock research and mutual funds to market to clients.
The marriage thus would fix the major problems both firms faced, at least in the eyes of industry analysts: Morgan, the investment banker to much of corporate America, could create securities for those clients but had a marketing force that aimed primarily at institutions, not the individual investors who are increasingly becoming a major--and, for brokerages, lucrative--source of demand for securities.
Dean Witter, meanwhile, has been highly successful selling basic financial products to middle America, but it underwrites relatively few securities itself, and its investment research and mutual funds have consistently been ranked mediocre or worse in independent surveys.
Yet in the competitive battle for the developing fortunes of aging baby boomers, “research and financial advice will become much more important--they are a clear area of leverage for brokerages,” said Navtej S. Nandra, partner in the financial services group of consulting firm Booz, Allen & Hamilton in New York.
So Dean Witter arguably needed a better image to win over more of the boomers who will soon be seeking financial help--especially with so many new, product-rich competitors, such as Fidelity Investments and discount brokerage Charles Schwab, trying to horn into the advice-giving business.
But if the question is who needed whom more for future success, the structure of this deal suggests an answer: Morgan is selling out to Dean Witter, not the reverse.
Indeed, blue-blooded Morgan’s willingness to marry Dean Witter, a firm still widely associated with formerly dowdy parent Sears, Roebuck & Co., is a vindication of sorts for Dean Witter Chairman Philip J. Purcell’s decades-old vision for sustained success on Wall Street--a vision that many other firms ridiculed in the 1980s.
Purcell believed the small investor could be a highly profitable client to court. He stressed Dean Witter’s role as an “asset gatherer” rather than a firm that ran from one hot Wall Street trend to another. He steered Dean Witter’s brokers to sell the company’s own mutual funds to clients rather than outside funds--a controversial strategy but one that assured Dean Witter a consistent annual flow of fee income on those assets.
While Sears and Dean Witter may have overreached with their “stocks-and-socks” idea of having Dean Witter brokers inside Sears stores, Purcell’s Discover credit card idea was a smash hit, and its success along with the brokerage’s have produced strong earnings that have enabled Purcell to keep building his empire.
Wall Street “made fun of him in the 1980s for selling mutual funds and for creating Discover,” said one financial services industry executive, who asked to remain anonymous. “But he understood the value of asset management.”
In contrast, Morgan Stanley--always at risk to downturns in the ever-cyclical securities underwriting business--only recently saw the wisdom of becoming an asset gatherer. Morgan bought mutual fund manager Van Kampen/American Capital last year, seeking to cash in on the public’s unprecedented hunger for funds--and reap the significantly higher returns available in that business compared with its traditional capital markets businesses.
Combined, Morgan and Dean Witter would have $270 billion in assets under management. And while the combined firm still would rank third behind Merrill Lynch and Smith Barney in total number of brokers, those brokers now could become much more competitive with Merrill and Smith Barney in the quality of the financial products they have to offer:
* Morgan ranked No. 1 in 1996 in underwriting initial public stock offerings--which in a bull market are usually in hot demand by investors. Clients of Dean Witter brokers presumably now would be cut into many deals that they otherwise might never get.
* Morgan’s stock research analysts ranked No. 2 last year, to Merrill Lynch, in overall talent, as judged by Institutional Investor magazine’s annual “All America Team” analyst rankings, which are based on a poll of big investors such as pension funds. Morgan had 41 analysts on the team, while Dean Witter had just three.
* Morgan’s stable of mutual funds could find a hungry audience among Dean Witter clients used to the brokerage’s own funds, which have a poor overall image for performance. Morningstar Inc., the fund-rating service, assigns a below-average one- or two-star rating (out of five stars possible) to 11 of the 25 Dean Witter funds it tracks, or 44%.
In contrast, only four of 17 Van Kampen funds, or 24%, rank two or fewer stars.
More Deal Coverage:
* Dean Witter, Discover & Co. plans to buy Morgan Stanley Group Inc. A1
* Merger mania may increase. D7
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New Titan on Wall Street
The merger of Morgan Stanley and Dean Witter will marry Morgan’s legendary corporate underwriting and stock research talent with Dean Witter’s huge retail brokerage sales force and flourishing Discover credit card business. The result, both firms hope, will be a brokerage that individual investors will seek out for advice, mutual funds and a wide array of financial products.
The No. 3 Brokerage Sales Force ...
Number of brokers, in thousands:
Merrill Lynch: 13.8
Smith Barney: 11.1
Morgan Stanley / Dean Witter: 9.3
Prudential Sec.: 5.9
A.G. Edwards: 5.7
Charles Schwab: 4.6
Fidelity Brokerage: 3.7
Edward Jones: 3.2
Inter-Regional Finl.: 1.2
Data based on Jan. 1, 1996 survey, except Morgan/Dean Witter total.
Source: Securities Industry Assn.
Morgan Stanley / Dean Witter would rank:
* No. 1 in global merger & acquisition advisory
* No. 1 in initial public stock offerings
* No. 1 in credit card customers
* No. 1 in common stock issuance overall
* No. 5 in mutual fund assets
* No. 8 in municipal bond underwriting
In addition, the combined firm would have:
* 399 offices worldwide
* 3.2 million retail customers
* 7 million mutual fund owners
Data based on 1996 performance.
Analysts on Institutional Investor magazine’s 1996 “All-America Team”:
Merrill Lynch: 46
Morgan Stanley: 41
Goldman, Sachs: 35
Donaldson Lufkin: 31
Salomon Bros.: 30
Smith Barney: 22
Prudential Sec.: 18
Sanford Bernstein: 16
Bear Stearns: 16
Dean Witter*: 3
* Dean Witter ranked 19th in the number of analysts on the “All-America Team.”
Source: Securities Industry Assn., Morgan Stanley, Dean Witter, Institutional Investor