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Dan Loeb's Third Point opened a position in Morgan Stanley (MS) in Q4, believing the 20%...

Dan Loeb's Third Point opened a position in Morgan Stanley (MS) in Q4, believing the 20% discount to tangible book is a "free call option on a promising restructuring." Change starts at the top, says Loeb, putting the board on notice. "One of MS's directors is familiar to us from previous corporate governance battles we have fought against moribund Boards not up to the job of turning around great institutions."
Comments (3)
  • The problem with Morgan Stanley is not some skewed asset valuation, but management, beginning with James Gorman, and ending with Greg Fleming. Smart managers learn from their mistakes, they don't compound them. The first mistake was the Dean Witter merger over a decade ago, which ultimately led to the near failure of Morgan Stanley in 2008. The response was to add to the failed Dean Witter experiment with another brokerage that was supposed to add stability.

     

    Thus, I wonder how the same management, which can't give decent returns to shareholders in the form of higher share prices, considering the decline from 107 to 20 over 12 years, is still employed. Their tactic is a joint venture, which is really a staggered acquisition, more like staggering acquisition, since the firm is still struggling and cannot pay higher dividends or bonuses.

     

    I would signal to Mr. Loeb that his analysis of a discounted share price is flawed on a few points. One is that the business model and assets are properly aligned. They aren't. The market is highly liquid and values companies such as Morgan Stanley accurately. Morgan Stanley has lagged behind its peers because management is poor, not because of the macroeconomic climate. While Wells Fargo and JP Morgan dwarf Morgan Stanley in market cap, and continue to make new highs, Gorman is still making promises and excuses.
    Better days are ahead, just give us more time. We did. 14 years is long enough.

     

    Time for Morgan Stanley to find a bigger partner based in the US, to give it the underlying financial strength it needs to service clients, employees, and shareholders. As of now, there is not just discounted share values because of flawed management, but also poor reasoning that gives rise to hedge funds taking positions in firms well beyond any hope of salvation.
    9 Jan 2013, 08:25 PM Reply Like
  • How did the Dean Witter experiment "ultimately lead to the near failure of Morgan Stanley in 2008"? If I remember correctly, the retail brokerage arm of MS was a profitable business segment during the crisis. It is also one of the more stable revenue/profit centers for the company.
    15 Jan 2013, 12:10 PM Reply Like
  • Sensible Investor,

     

    I'm not sure where you sourced your data. This is not the same management team from fourteen years ago. Phillip Purcell and John Mack have both left the company while Gorman joined within the past five years. Gorman's strategy is too shift the revenue drivers of the firm to wealth management rather than proprietary trading and investment banking. Future cash flows from asset and wealth management firms are generally ascribed a lower discount rate. This will in turn allow MS to trade at higher forward multiples once the market recognizes this strategic transition.
    Also, isn't it use a 110 stock price as a base level for comparison? The share price escalated that high not due to managerial decision making but because of irrational exuberance. The market was trading at all time peak valuation levels (as measured by the Shiller PE).
    20 Nov 2013, 02:34 AM Reply Like
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