Fury after Warburg merger collapses

Worries over massive staff cuts were instrumental in undermining the proposed merger between SG Warburg and Morgan Stanley that was called off suddenly last week, it has emerged. Since then, a furious row has broken out between the two investment banks over which is to blame.

Senior executives of Mercury Asset Management, Warburg's fund management arm, have strongly denied the official reason that problems over MAM scuppered the deal.

It is clear that another important factor was widespread unrest among Morgan's London staff at suggestions in this newspaper that they would suffer large-scale redundancies if the deal went through.

"That article of yours blew the roof off here," a Morgan Stanley executive said. "By Tuesday, all copies of the Independent on Sunday had been placed under lock and key."

Officials were angered by Warburg suggestions that of the two it was the senior bank in Europe and would therefore take priority when jobs were allocated in overlapping areas.

"We are a tighter, more efficient, more profitable operation than Warburg in Europe," another Morgan Stanley executive said.

Others at Morgan Stanley said they thought Warburg had sought the merger as a way of cutting its own staff numbers.

The merger collapsed unexpectedly on Thursday, after Morgan Stanley backed out without warning following a visit to England by its president, Dick Fisher. Morgan Stanley blamed the failure on the demands of minority shareholders in MAM to be paid a premium for their shares and for the company to have guaranteed autonomy.

However, senior MAM officials denied that it was at the root of the problem. They pointed out that 10 days ago Morgan Stanley had said it was doing the deal for strategic investment banking reasons, then contradicted itself last week by saying that all it had really wanted was to gain control of MAM.

Warburg officials said last week that this was not the only - or even the most important - reason for Morgan Stanley's withdrawal.

"If it is true that all they wanted was us, why did Dick Fisher only come to talk to us last Tuesday?" asked one MAM executive. Although Hugh Stevenson, chairman of MAM and a Warburg board member, had known of the merger proposal for several weeks, his first meeting with Mr Fisher to discuss the terms of the deal did not take place until early last week.

Although the subject of a premium price and of MAM's independence were discussed in general terms, there were no concrete proposals by the time Mr Fisher returned to the US.

The failure of the merger talks leaves Warburg in a highly exposed position. The bank insisted on Friday that it was not looking for any other merger partners and that the deal had offered special advantages. However, many in the City believe the collapse of the deal has highlighted Warburg's weaknesses as a global investment bank. Although a hostile bid seems unlikely, Warburg's reputation has suffered.