Dean Witter to Buy Morgan Stanley in $10-Billion Deal


Brokerage and credit-card giant Dean Witter, Discover & Co. on Wednesday agreed to buy investment banker Morgan Stanley Group in a $10-billion deal that the partners hope will win them a bigger share of the huge pool of money that small investors are pouring into the stock market.

The combined company--to be called Morgan Stanley, Dean Witter, Discover & Co.--will overtake Merrill Lynch & Co. as America’s largest securities firm, with 44,200 employees, offices in 21 countries and a stock-market value of nearly $23 billion.

Experts say the deal may signal a new upsurge in the continuing consolidation in the financial-services industry, pushing other Wall Street firms to seek partners who can boost their deal-making capital, global reach and access to small investors.


“Investment bankers in the past never really thought the individual investor was that important. They just focused on institutional clients,” said Stephen Willard, a former investment banker now with the law firm of Gibson, Dunn & Crutcher in Washington.

“Morgan’s action is a bet that with baby boomers worrying about retirement, the individual is going to remain an important force even after this current stock-market boom subsides.”

As the consolidation goes forward, analysts say, individual investors can expect to see a wider variety of mutual funds and other investment products being sold by a smaller number of large firms, including commercial banks.

Although Morgan Stanley is a global leader in its central businesses of underwriting securities offerings and providing high-finance advice to corporate clients, it lacks a strong retail network or a brand name familiar to consumers.

Dean Witter fills both of those gaps with America’s third-largest sales force of 9,000 brokers in 361 U.S. offices and its high public recognition as both a brokerage and the issuer of 39 million Discover credit cards.

Moreover, retail brokerage commissions and credit-card interest are stable sources of revenue to balance Morgan Stanley’s more volatile--if highly profitable--investment banking fees.


On the other side of the table, the deal buys Dean Witter instant credibility among corporations and institutional money managers who rank Morgan Stanley No. 1 or No. 2 on Wall Street in stock and bond underwriting, advisory expertise and investment research. And Dean Witter, which ignored the international arena while building its U.S. retail base, now links up with Morgan Stanley’s platform of 27 overseas offices.

The stage is now set for the combined firm to directly challenge Merrill Lynch, which had been the only U.S. company at the top of both the retail-brokerage and investment-banking heaps.

As enticing as the benefits may have been for Morgan Stanley, its motivation was also defensive, said Ken Fisher, chief executive of Fisher Investments in Woodside, Calif.

“A big reason they’re doing this is it eliminates the possibility of somebody doing a hostile [takeover] on them,” Fisher said.

With U.S. regulators weakening the legal wall between commercial banking and the securities business--and with Congress considering dismantling it entirely--large banks are on the prowl for investment banking and brokerage acquisitions.

Morgan Stanley alone would be a fairly small bite for a Chase Manhattan Corp.--with a stock-market value of more than $41 billion--or for an even larger foreign bank.

Morgan Stanley Chairman Richard B. Fisher said as much in Wednesday’s New York press conference at which the deal was announced. With global consolidation a given, he said, “it makes sense to pick your own partner.”

The agreement puts pressure on other Wall Street firms, particularly such publicly traded brokerages as PaineWebber Group and Lehman Brothers Holding. PaineWebber has been the source of intense merger speculation in recent days, with rumored suitors including BankAmerica Corp. and--ironically--Morgan Stanley. (BankAmerica and PaineWebber have each denied having any such discussions with the other.)

Regional brokerages, including A. G. Edwards of St. Louis and Alex. Brown of Baltimore, also are likely to be acquired, perhaps by major regional banks, analysts said.

The Dean Witter-Morgan Stanley deal, which requires approval from shareholders on both sides, is far from risk-free. Although they are cousins in the securities business, they are distant cousins, with vastly different cultures. Like surgeons in the medical profession, investment bankers--especially merger-and-acquisition specialists--consider themselves the gunslinger elite of the business, with pay, perks and even jargon that set them apart from mere brokers.

Previous securities-industry mergers--notably the Shearson-Lehman-American Express combination and Dean Witter’s own ill-starred alliance with Sears Roebuck & Co.--have faltered over seemingly minor cultural issues, such as who reports to whom and which department seems to be getting the most attention from the top brass.

Dean Witter’s chairman and chief executive, Philip J. Purcell, 53, will be chairman and chief executive of the new company, with Morgan Stanley’s president, John J. Mack, 52, becoming president and chief operating officer.

Morgan Stanley’s Fisher, 60, will back away from a day-to-day role, serving as chairman of the executive committee of the new company’s board.

Mack dismissed speculation that he would chafe at being No. 2 to an executive practically the same age, saying: “Some people don’t know me well. I care about being on the best team.”

Still, if Purcell fumbles or pushes too hard for control, Morgan Stanley’s top investment bankers, led by legendary deal-maker Joseph R. Perella, could walk out the door and take much of the merger’s value with them.

As Fisher--the California investor, not the Morgan Stanley chief--put it: “If the brains leak out, this deal’s a disaster.”

Under the merger agreement, Morgan Stanley shareholders will get 1.65 Dean Witter shares for each Morgan Stanley share they hold. At Wednesday’s stock market close, that worked out to $67.24 a share.

The value will fluctuate with Dean Witter’s stock price between now and the time the deal closes, which is expected to be in mid-1997. Dean Witter shareholders will hold about 55% of the new company’s shares, with Morgan Stanley shareholders getting 45%.

In the new company, Purcell will oversee Dean Witter’s retail asset management and credit services. Morgan Stanley’s Mack will oversee institutional and retail securities, investment banking and Morgan Stanley’s asset management division.

On a day when the Dow Jones industrial average dropped 86.58 points, or 1.3%, shares of Morgan Stanley soared $7.875 to $65.25 and Dean Witter rose $2 to $40.625 in trading on the New York Stock Exchange.

Anticipating more merger action, investors also bid up shares of other financial services companies, including Bear Stearns Cos. and Donaldson, Lufkin & Jenrette.

* INDIVIDUAL IS KING: Deal signals importance of reaching small investors. D1