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The board of directors at morgan stanley dean witter

Now the old guard is on the march. A dispatch from behind the lines. It used to fit pretty well. This was a place where you could catch a glimpse of the dinosaurs who once stood atop the Wall Street food chain, men like S. Parker Gilbert, whose stepfather co-founded the firm in 1935, and Anson Beard Jr.

Today, of course, the nickname fits even better. As in the novel and the movie, the dinosaurs have broken loose, they are making lots of noise, and they are out for blood.

Dismayed by the firm's falling stock price and alarmed by an exodus of top talent, eight retired Morgan Stanley bankers are pressing a public campaign to oust CEO Philip Purcell. It's the kind of open warfare rarely seen on Wall Street--mainly a battle about alleged mismanagement, but clearly a personal fight too. At its heart is one autocratic manager, Purcell, and two corporate cultures, those of Morgan Stanley and Dean Witter, which merged in 1997.

Purcell came from Dean Witter, the prosaic retail brokerage. His opponents hail from Morgan Stanley, the white-shoe firm whose bankers regard themselves as Wall Street's elite. The merger was supposed to produce a financial-services powerhouse with a wide spectrum of products, and during the bull market it seemed to be working what didn't? But beneath the surface the two sides didn't try very hard to conceal their mutual scorn.

The board of directors at morgan stanley dean witter

They were the ones who walked on the treadmills. We would have meetings with them, and they would ask to present first and then just leave. They wouldn't stay for us. Maybe they had somewhere to go. Here is a union engineered by some of the world's foremost experts in the art of mergers and acquisitions.

They have made huge personal fortunes putting companies together, collecting their fees, and then walking away. But this time they must live with the combination they have created.

And FORTUNE's conversations with current and former bankers--including an extended sit-down with six of the eight dissidents--combined with analyses of financial statements from both sides, reveal a merger that's nothing short of toxic. Purcell, 61, declined to be interviewed.

As this issue went to press, he still had his job as CEO. He may keep it for a long time: His detractors say that he has packed the board see chart and that he picks key executives on the basis of loyalty rather than ability. On the other hand, top talent keeps departing the firm on a nearly daily basis--in mid-April the fabled investment banker Joe Perella walked away. The online trading site Intrade. A senior investment banker at a rival firm puts the mess into context this way: A CEO who isn't terribly popular, who gets rid of any executive who isn't loyal to him.

He packs the board with his pals, and the company's stock performance is mediocre. There is no such thing as equilibrium in our business. No one comes to work to be mediocre. That's why employees are leaving. They have some 200 years of collective experience at Morgan, many hundreds of millions of dollars of personal wealth, and overstuffed Rolodexes. Though retired from day-to-day operations, most if not all are advisory directors. It's a question of leadership.

But use a different time frame and--surprise--you get a different picture. They also say that after the bust of 2000, Morgan had further to fall than rivals because it had climbed so high with technology deals: Its stock sold for almost seven times book value at the height of the bubble, nearly two multiples higher than Goldman Sachs's stock has ever achieved.

Even starker is the difference in how the two sides value the businesses that make up Morgan Stanley today. On an April 6 conference call that the G8 held for investors, the group complained that Dean Witter simply hadn't kept up.

Scott noted that this was supposedly a merger of equals, meaning that Morgan Stanley and Dean Witter were worth roughly the same amount. That implies that the individual investor and asset-management businesses were worth next to nothing. Valuations are notoriously tricky, but other numbers leave little doubt that Morgan Stanley has failed to meet the promises made at the time of the merger and that its performance has been, to use the G8's word, mediocre.

The merger was supposed to integrate Morgan Stanley's investment-banking franchise with Dean Witter's huge retail sales force to create a great white Wall Street shark. This is a "lousy day for Merrill Lynch," Purcell reportedly said at the time of the merger.

One of the promises of the merger was that the new firm could sell mutual funds and stock offerings, mostly from the old Morgan Stanley side, to the board of directors at morgan stanley dean witter customers, mostly on the Dean Witter side.

Sounds like a great idea, but making such a system work can entail some greasing of the wheels: The best way to encourage a broker to sell a specific mutual fund is to compensate him for selling it. That, however, is illegal, since it violates the fiduciary duty of the broker to put the financial interest of the client first in any transaction.

Annaly Capital Management Inc

After the wave of Wall Street scandals, the preferential selling of in-house funds by brokers is now being actively prosecuted. Another promise was that Dean Witter's supposedly more predictable retail business could stabilize Morgan Stanley's volatile earnings during market cycles.

It has not worked out that way. In 2004, Goldman earned slightly more than Morgan Stanley. You can see why when you dig into the details. The best thing Purcell's team can say about the individual-investor business is that it's No.

Over the past five years total client assets, revenues, and pretax profits have all declined. Morgan The board of directors at morgan stanley dean witter brokers are far less productive than their peers: The asset-management business has also been mediocre.

The Greenhill team points with scorn to the same statistic, noting that it places Morgan in the bottom third of its peer group. Another Morgan Stanley critic, hedge-fund manager Scott Sipprelle, notes that inflows into Morgan's funds have lagged the industry for five of the past six years; revenues and pretax profits have also declined by an average of 1. Morgan Stanley points out that both businesses have improved over the past 12 months.

Here Morgan Stanley still has a strong market share in many businesses, but some see signs of deterioration. Take mergers and acquisitions, the heart of an investment-banking franchise. And morale is not good. Investment banks are always hothouses of intrigue, but in the eight years since the merger, the bad buzz emanating from the house of Morgan has been louder than the norm.

As 2004 drew to a close and the stock still the board of directors at morgan stanley dean witter the likes of Goldman Sachs, Merrill Lynch, Bear Stearns, and Lehman Brothers, discontent with management grew. In it he urged Morgan Stanley's directors to return the company to its investment-banking core by divesting the Discover credit card business, the investment-management business, and the brokerage business. He warned board members that if they didn't address his concerns, he would oppose their reelection.

The board never responded, and on Jan. And then Purcell began to do what some say he does best: Days after the directors received Sipprelle's letter, the CEO tapped an old acquaintance, Ed Brennan, the former CEO of Sears, to come out of retirement and rejoin Morgan Stanley's board--even though the company's age limit for directors is 70 and Brennan was about to hit 71.

The two men were allies. Brennan had served on Dean Witter's board and then on the board of the merged company until 2003. Purcell had founded the Discover credit card business while working for Brennan at Sears, before Discover and Dean Witter were spun off in 1993. Watching all this with dismay were Gilbert, Scott, and the other advisory directors.

On March 3 they wrote the board seeking a private meeting and expressing the fear that Purcell would fire executives perceived as insufficiently loyal. Shortly after Easter Sunday, Vikram Pandit, head of institutional securities; John Havens, head of institutional equities; and president Stephan Newhouse--all highly regarded on Wall Street but not perceived as Purcell allies--were pushed aside.

Their responsibilities were given to two other Morgan Stanley executives, Stephen Crawford and Zoe Cruz, who were made co-presidents and named to the company's board.

Pandit, Havens, and Newhouse left the company. Pandit's departure was especially shocking to Morgan Stanley veterans, as he had been seen as a candidate to run the company one day. It prompted Dan Strickler, a genteel former Morgan banker and owner of 3. But Fisher is holding his Discover card with his finger over the name. Because it wasn't his card--he didn't have one.

It was Mack's wife's card. The businesses of the old Morgan Stanley--such as securities underwriting, mergers and acquisitions, and trading--are based to a great extent on key personal relationships. Lose a top banker or a big banking client and millions of dollars of revenue walk out the door. Though Dean Witter has thousands of brokers who have personal relationships with customers, both the broker and the customer are replaceable because they are much smaller pieces of the revenue pie.

That's a little like thinking you can bring rational business practices to a Major League Baseball franchise. One former Morgan executive says he heard Purcell complain, "At Dean Witter, I tell people to turn left, and they turn left.

At Morgan Stanley, they look at me and ask why. Yet Purcell, the stockbroker guy, has consistently outmaneuvered the boys from the Yale Club. A former Morgan banker puts it best: Morgan Stanley is a "bunch of white-shoe guys who, to my amazement, have completely gotten their pants pulled down by Phil Purcell.

As an example, sources point to the case of Peter Karches, the outspoken former head of institutional securities at Morgan Stanley. In 2000, Purcell became disenchanted with Karches and wanted him out of the firm.

At that point Karches was representing Morgan Stanley at meetings with other investment banks about a cooperative bond-trading system. Purcell told a senior Morgan Stanley executive that Karches had to go.