Morgan Stanley merger creates $21bn US giant

Morgan Stanley, the top-drawer investment bank, and Dean Witter, Discover, America's main street securities retailer and credit card giant, stunned Wall Street yesterday by announcing a merger.

The deal, worth $10.2bn (pounds 6.2bn), is the largest attempted in the financial sector and promises to forge the biggest securities firm in the world. It could also trigger a wave of consolidations among other securities companies.

Sir David Walker, executive chairman of Morgan Stanley in Europe, said there should be no concern for jobs in London or Europe. "This is exceptional among financial institutions mergers. This is top-line revenue enhancements, revenue quality. It's not cost-driven.

"The cost savings are very small indeed. We're not looking to be laying off on a material scale."

Morgan Stanley employs around 2,000 staff at its London headquarters in Canary Wharf, Docklands, while Dean Witter's offices in the Broadgate development in the City are much smaller.

Sir David saw the merger as a deal between equals with very little overlap. "The two businesses are very substantially complementary," he said.

The new company, to be called Morgan Stanley, Dean Witter, Discover & Co, promised that it would become a daunting international powerhouse that would bring together the retail and credit card clout of Dean Witter and the 60-year tradition of investment banking represented by the venerable Morgan Stanley.

"We are bent on creating the pre-eminent financial services firm globally," said Philip Purcell, the chairman and chief executive of Dean Witter who will retain the same titles in the new organisation. "The only debate is whether we say pre-eminent or dominant."

Together, the two companies will boast a market capitalisation of $21bn and will manage assets worth $270bn, more than any other securities firm and the fifth-biggest amount of money managed by any other firm in the world.

The new giant will eclipse Merrill Lynch, which has a capitalisation of $14bn, the only other Wall Street firm that has sought to bridge the divide between retail and blue-chip investment banking services.

The new company is expected to take an aggressive tack in pursuing further expansion particularly outside the US, including Europe.

Morgan Stanley is primarily an institutional business, involved in underwriting securities, corporate finance and asset management, while Dean Witter derives 47 per cent of its revenue from its Discover credit card, which has 39 million holders. The remainder comes from retail business.

"Dean Witter has a pipeline which goes to the retail side but it doesn't have enough to put in the pipeline," said Sir David.

Morgan Stanley would be able to provide the additional products and at the same time would receive an additional distribution channel.

Other attempts by Morgan Stanley to pull off large mergers have failed, most notably its bid in 1994 to buy SG Warburg, the UK house which was eventually snapped up by Swiss Bank Corporation.

"Warburg didn't come off because we couldn't reach an agreement on asset management, but we'd loved to have done that deal," said Sir David.

Instead, Morgan Stanley expanded its asset management business by two acquisitions of specialist fund management groups - Miller Anderson & Sherrerd and Van Kampen.

Morgan Stanley was set up in 1935 when several partners and staff left JP Morgan after the Banking Act of 1933 prevented financial firms being involved in both commercial banking and securities.

Dean Witter was spun off from Sears, the retailer, in 1993. It focuses on selling securities to individuals and has a huge distribution network in the US with 361 branch offices and 9,300 brokers.

Expected to be sealed by the middle of this year and already approved by both boards, the merger will involve Dean Witter swapping 1.65 shares for each Morgan Stanley share.

Dean Witter shareholders will own about 55 per cent of the new companies and Morgan Stanley holders about 45 per cent. Morgan Stanley staff directly and indirectly hold 40 per cent of the equity in their company, a substantial part of it through "lock-up" agreements that prevent them selling. These will be maintained.

The new board will have equal representation from the boards of Morgan Stanley and Dean Witter. The posts of president and chief operating officer will go to John Mack, currently president of Morgan Stanley. Mr Mack indicated yesterday that he and Mr Purcell had first discussed a possible merger of the firms as long as three years ago. He waved his personal Discover Card in front of reporters, claiming he had had it for three years.

Richard Fisher, chairman of Morgan Stanley, will be chairman of the executive committee of the board of the new firm. He said the move had been driven in part by anticipation of consolidation in the sector.

"We have believed for some time that there will be consolidation and convergence in many industries around the world and, of particular relevance, in financial services," he said.

While the companies conceded that some cost-savings arising from the merger would be pursued aggressively, they gave no lay-off figures yesterday. Mr Mack underlined that redundancies would be a small part of the picture.

The reception to the deal on Wall Street was warm with shares in Morgan Stanley jumping $7.75 in early New York trading to $65.125 and Dean Witter stock rising $1.875 to $40.50.

Comment, page 21

The rivals

(value, in $)

Merged group 21bn

J P Morgan 19bn

Merrill Lynch 14bn

Goldman Sachs 10bn (est)

Bankers Trust 7bn

Paine Webber 3bn

The rankings

Global M&A - top

Research - second

Biggest securities industry investment manager

9,300 retail broking account executives

3.2 million retail customers

Biggest US credit card by customer number (39 million)

Second biggest US credit card by sales volume ($54bn)

The merger

Morgan Stanley Dean Witter Merged group

($) ($) ($)

Market cap 9.081bn 12.267bn 21.349bn

'96 pre-tax profit 1.572bn 1.545bn 3.117bn

'96 net revenues 5.776bn 6.23bn 12.006bn

Source: Morgan Stanley

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