By CHARLES GASPARINO and ANITA RAGHAVAN
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- When Morgan Stanley announced it was merging with
Dean Witter in 1997, some of Morgan's executives were aghast to learn
that they'd be reporting to counterparts from the former Sears,
Roebuck & Co. unit.
But Morgan's charismatic leader, John Mack, spread
the word to his troops that they shouldn't worry.
"Be patient," he would say. "The cream always rises
to the top."
Within Morgan, it was widely understood that Mr.
Mack was speaking about his own situation, too. As
part of the blockbuster deal, he had agreed to take
the No. 2 job at the newly formed Morgan Stanley
Dean Witter & Co., leaving the chairman and chief
executive titles to Dean Witter's longtime head,
Philip Purcell.
Many on Wall Street figured it was merely a
temporary concession. After all, Morgan was Wall Street royalty, with a
list of blue-chip clients stretching back to the previous century. Dean
Witter, by contrast, was a retail brokerage house catering to small
investors. As for the principals' reputation for hand-to-hand corporate
combat, their nicknames said it all: "Purcell the Nice" was up against
"Mack the Knife."
But when the dust settled earlier this year, it was
the 57-year-old Mr. Purcell who had consolidated
his hold at the top, and the 56-year-old Mr. Mack
who became jobless after a surprise resignation.
What happened? A reconstruction of the power
struggle, compiled through interviews with two
dozen current and former Morgan Stanley Dean
Witter executives and others, shows how Mr.
Mack's early tactical errors, compounded by
personality differences between the two main
protagonists, led to his undoing. More broadly, it
sheds light on the internal disruptions that are
occurring out of the public eye as Wall Street firms
bulk up into ever-bigger financial-services supermarkets.
Investors are watching closely to see whether the split means trouble
for Morgan Stanley, one of the most profitable firms on Wall Street
during the heady bull market. During the past six months, Morgan
Stanley has lost about a half dozen key executives, many loyal to Mr.
Mack, in a broad management shake-up, and headhunters are circling
others. At the same time, the souring market is hitting Morgan Stanley
hard; Wednesday, the firm announced that profits fell 34% in the first
fiscal quarter to $1.02 billion. Some on Wall Street say that Mr. Mack's
departure leaves a vacuum just when Morgan Stanley most needs his
particular strengths -- managing trading risks and leveraging close
relationships with clients.
"Mack and his troops will be sorely missed as we
go into tougher times," says veteran Wall
Street executive Michael Holland, president of
Holland & Co., a New York money-management
firm.
Morgan Stanley, which declined to make Messrs. Purcell and Mack
available for interviews, has taken pains to play down the internal
feuding. In a prepared statement at the time of the January 24
resignation, Mr. Purcell heaped praise on Mr. Mack. "As my colleague, as
a leader, and as a mentor and friend to the most talented people in our
industry, he will be greatly missed," the statement said.
Mr. Purcell is working hard to assuage remaining Mack loyalists. At a
recent closed-door meeting with analysts, Mr. Purcell said senior
executives had pledged orally to stay put for five years. As for the
defections, he said the company will do just fine with new blood.
"Having new people in these jobs is good," Mr. Purcell told the analysts.
But it's clear that the fighting left deep wounds. The fault lines first
surfaced in early 1997 during a series of dinners at the Central Park
West apartment of Richard Fisher, then CEO of Morgan Stanley. With a
vista of the park spreading out below, executives of the two firms met
to hammer out final details of a merger that both sides wanted badly.
Morgan, for all its pedigree, yearned for a retail brokerage network to
help sell the stocks and bonds it underwrote for its blue-chip corporate
customers. Dean Witter, not long removed from an embarrassing
experiment with brokerage offices in Sears stores -- dubbed "socks and
stocks" -- was in the market for an image makeover, despite posting
solid profits.
There were only a few sticking points. Mr. Purcell waded into the most
explosive issue just a few days before the merger was sealed. Dean
Witter, with its larger market capitalization, was technically the acquirer.
It was only fair, he argued, that the first CEO come from Dean Witter.
Mr. Mack, who at the time was Mr. Fisher's designated successor at the
old Morgan, was initially taken aback. He had envisioned running the
firm, or at least sharing the top job. But after sleeping on it, he walked
into Mr. Fisher's office and said the merits of the deal were too
compelling "to make this an issue." Mr. Fisher cautioned him against
acting hastily. But Mr. Mack felt he had developed a bond with Mr.
Purcell. "I trust him; I know I can work with him," Mr. Mack told
colleagues, according to people with knowledge of the conversations.
Mr. Fisher, bent on clarifying Mr. Mack's future, broached the issue
again. Since both Mr. Purcell and Mr. Mack were about the same age and
their careers could be expected to last another 10 years or so, he
argued, it would make sense for Mr. Mack to succeed Mr. Purcell midway
through that period.
Heavy Haggling
Exactly what Mr. Purcell said in response is in dispute, and none of the
key figures will talk about it publicly. In any event, Messrs. Mack and
Fisher came away from their talks convinced that they had an informal
agreement that Mr. Mack would succeed Mr. Purcell as CEO roughly in
five years. A Morgan Stanley spokesman says that while Mr. Purcell
agrees that Mr. Mack was ultimately designated as his heir apparent,
there was no set timetable for when Mr. Mack would take over. One of
Mr. Purcell's advisors during the negotiations, Tom Schneider, says he
wasn't aware of any discussion of a timetable.
The haggling wasn't finished. Just days before the merger was set to be
unveiled, Mr. Purcell weighed in with another demand: a change in
corporate bylaws that would mean neither top executive could be
ousted without a three-quarters vote of the board of directors.
The move struck some Morgan executives as a ploy by Mr. Purcell to
protect himself in the event of a coup. But the Dean Witter executive
argued that the merger would run much more smoothly if people on
both sides knew that their leading man wouldn't be fired through some
corporate power play.
The Morgan side ultimately agreed. And so the blockbuster deal was
done. Despite a show of unity, however, there was plenty of speculation
inside and outside of the firm about which of the two strong-willed
executives would emerge on top.
Mr. Purcell, although not as well-known as his new subordinate, was
obviously no pushover. Raised in a middle-class Irish Catholic family in
Salt Lake City, he became the youngest managing director at McKinsey
& Co. at age 32. As head of strategic planning at Sears, he spurred
the
retailer into purchasing Dean Witter in 1981, then left to head the firm
when it was spun off a little over a decade later. By the time of the
Morgan merger, he had built Dean Witter into a solid,
middle-of-the-pack brokerage house.
But most of the betting was on Mr. Mack, a stocky North Carolinian and
son of a Lebanese immigrant. A 27-year Wall Street veteran, he had
already scored a corporate coup in the early 1990s, when he replaced
famed investment banker Robert Greenhill as president and heir
apparent to the top job at Morgan. And he thrived in Morgan's
high-pressure meritocracy, where big producers could earn huge bucks.
In 1996, he pulled down salary and bonuses of $10 million -- more than
twice the $4.3 million in cash and stock Mr. Purcell had made in the
less-glamorous brokerage business.
But internally, the Morgan Stanley side started getting bad premonitions
almost from the start. Shortly after the merger, Mr. Fisher traveled
downtown to Dean Witter's offices to meet with Mr. Purcell. When he
arrived at its World Trade Center headquarters, there was no pass
waiting for him; he had to stand in line. Later, when Mr. Purcell ordered
the management suite in the Midtown Manhattan headquarters of the
former Morgan Stanley to be reconfigured for use of the merged firm
and moved to the building's 39th floor, Mr. Fisher was relegated to the
40th floor.
Mr. Fisher didn't complain about either the pass or his office. He said
in
a recent interview that he "never felt Phil was doing anything aimed at
isolating me."
Others took a more skeptical view. Even though Mr. Purcell had spoken
of running the firm as a partnership, Morgan Stanley loyalists noted
that the new CEO did most of the speaking at the first annual meeting,
while his No. 2 largely remained quiet. Mr. Mack also gradually withdrew
from communications with securities-industry analysts.
Then came the usual spats over personnel. Mr. Mack was willing to tame
his own lieutenants to make the merger work, according to people in his
camp. One example involved Morgan's own brokerage group, which now
found itself reporting directly to Dean Witter executives. When Mr. Mack
heard that some of these executives weren't happy with their new
reporting assignments, he stamped out their complaints. "This is a small
piece of a big merger and I will not have any dissenters," he told Jeff
Salzman, the Morgan Stanley executive who was then head of the
group, according to a person with knowledge of the discussion. "Your
guys have to fall in line or I will fire all" of them. Mr. Salzman declined
comment.
Mr. Mack's closest advisers weren't spared when he felt that they were
impeding the merger. Elaine LaRoche, his former chief of staff, warned
him to watch his back. Mr. Purcell will "squeeze you," she cautioned Mr.
Mack, witnesses say. Mr. Mack bristled, saying Ms. LaRoche was disloyal.
She later was given a job in China, and has since left the firm.
Mr. Purcell, meanwhile, was very protective of his linemen, Dean Witter
veterans, often at the expense of Mr. Mack. He took special care of
James Higgins, the head of Dean Witter's retail brokerage operations.
Shortly after the merger, Mr. Mack took control of the core
retail-brokerage business, with Mr. Higgins officially reporting to him.
But Mr. Higgins often continued to deal directly with Mr. Purcell. This
became an issue about six months after the merger, when Mr. Mack
began visiting Dean Witter branch offices around the country.
One afternoon, after meeting with a corporate client in the San
Francisco area, Mr. Mack stopped by a local branch office in Hayward,
Calif. "I'm John Mack" he told the receptionist. "I'm here to see the
branch manager." People were stunned; in the past, visits from top
brass were planned weeks in advance. Mr. Mack, after convincing the
skeptical branch manager of his identity, held court, listening to the
concerns of brokers. When it was over, Mr. Mack thought he had hit a
home run, people in his camp say.
Then he heard from Mr. Higgins. "Could you give me a heads up when
you are going out to the field?" Mr. Higgins asked. After several repeat
performances, Mr. Higgins complained to Mr. Purcell that the
unannounced visits were disruptive. Mr. Purcell told Mr. Mack to
coordinate his visits, but Mr. Mack soon stopped them altogether.
Another sore spot involved an initiative by Mr. Mack to have brokers
offer low-cost online trading. Mr. Higgins successfully appealed to Mr.
Purcell to resist the effort; too many brokers, he said, would leave the
firm if they implemented the system immediately. Mr. Purcell agreed.
But Mr. Mack complained. "How can I manage retail if all these guys go
behind my back to you?" he implored of Mr. Purcell, according to a
person familiar with the matter. Mr. Purcell threw up his hands, saying
he had known Mr. Higgins for years.
The deepening turf battles were exacerbated by the very different
personal styles of the two top men. Mr. Purcell, who reveled in his
reputation as a strategic thinker, complained to others that Mr. Mack
had a short attention span. Mr. Mack, meanwhile, moaned that Mr.
Purcell couldn't make a decision.
Marching Orders
While Mr. Mack had been reared in a consensus-driven partnership,
where lively debate was encouraged, Mr. Purcell was more authoritarian.
"I can tell a bunch of Dean Witter guys to turn left and they'll do it
immediately," he once told a colleague. "I say that to the Morgan
Stanley guys, and they'll ask why."
In the summer of 1998, Mr. Mack, frustrated that his original deal
hadn't given him enough broad authority, launched an attempt to have
himself named co-CEO. But the idea, which had been tried with mixed
success elsewhere on Wall Street, went nowhere. Not even Mr. Mack's
chief ally on the board, Mr. Fisher, agreed. Mr. Purcell, who strongly
opposed the move, reassured Mr. Mack that he would someday get a
chance to run the firm, according to a person familiar with the matter.
But that day appeared as if it would never come, at least as far as Mr.
Mack was concerned. The explosion of an emerging-market debt fund
run by Morgan Stanley money manager Paul Ghaffari in the fall of 1998
provided Mr. Purcell with another opportunity to gain power.
Hit by the sell-off in emerging markets, Mr. Ghaffari's highly leveraged
hedge fund cost Morgan Stanley nearly $300 million in pre-tax losses.
Mr. Purcell seized on the losses and pushed to shift the
asset-management business away from Mr. Mack and to one of his
aides, Mitchell Merin. Two Morgan Stanley executives, Mr. Ghaffari and
James Allwin, head of the asset-management unit, resigned.
By early 1999, Mr. Mack began consulting friends about his
predicament. Mr. Fisher's advice: Hang in there, it's only a matter of
time before you get your chance. The battle lines were drawn among
top executives, too. At one point, Mr. Purcell approached Peter Karches,
Mr. Mack's top aide who oversaw the firm's institutional business,
according to someone with knowledge of the exchange.
"What can I do to keep John happy?" Mr. Purcell asked, according to
this person. Mr. Karches didn't mince words. His response: "Just leave."
By the fall of 1999, Mr. Purcell broke the news to Mr. Mack: He was
restructuring the company once again, and taking back control of the
powerful brokerage unit. Mr. Mack would get the credit-card unit, in
addition to the investment banking operations he had been running all
along. According to someone familiar with the discussion, Mr. Purcell
told Mr. Mack that he was going to be CEO so he needed to run a
consumer business.
Mr. Mack was dubious. Around then, he went so far as to threaten to
quit, alarming some board members. One person familiar with the
matter says some influential directors assured Mr. Mack that his time to
run the company would come.
But the balance of power had shifted against Mr. Mack, as a series of
departures from the board allowed Mr. Purcell to nominate new
directors. A particular blow came when Mr. Mack's close ally Mr. Fisher
left the board, which now stands at eight to three, in favor of the Dean
Witter camp.
Further humiliations followed. After months of complaints by Morgan
Stanley executives, and Mr. Mack himself, Mr. Higgins resigned in June
2000 as head of the firm's vast brokerage network. But Mr. Purcell
didn't tell Mr. Mack about the move until about an hour before the
company made the announcement, according to people with knowledge
of the matter.
When confronted by an angry Mr. Mack, Mr. Purcell told him he couldn't
trust him to keep the news inside the firm, a person familiar with the
conversation said. "You fed me!" Mr. Mack boomed, according to this
person. "Never refer to me as your partner again."
The next shoe to drop came a few weeks later when Mr. Purcell called a
meeting to discuss some potential management changes. This time, Mr.
Purcell took aim at Mr. Karches, a close friend of Mr. Mack. People with
knowledge of the meeting say Mr. Purcell said Mr. Karches didn't have a
strong enough plan to deal with the technological changes in the
institutional securities business, and that he needed to make
management changes to deal with these issues.
Mr. Karches was livid. "Phil, this has nothing to do with technology,"
he
barked, according to people with knowledge of the conversation. "If you
want to make changes, make changes, but don't insult all of us."
Mr. Purcell began talking to board members about removing Mr. Karches
from his post. Mr. Mack wasn't consulted on the issue, these people
say. In late August, Mr. Karches resigned.
By the end of the year Mr. Mack had made up his mind to leave the firm
in February 2001, around the four-year anniversary of the merger. In
late January, Mr. Mack strode into Mr. Purcell's office and announced he
was leaving. According to someone familiar with the meeting, Mr. Purcell
did nothing to change his mind and instead urged they work out the
details as quickly as possible.
Mr. Fisher jumped in. He asked Mr. Purcell not to accept the resignation
for the good of the company. Mr. Purcell said he couldn't do that. Then
Mr. Fisher asked for permission to address the board personally. Mr.
Purcell came back with more bad news. The board, he told Mr. Fisher,
doesn't want to hear from him.
On January 24, when Morgan Stanley formally announced Mr. Mack's
resignation, some long-time staffers were stunned. Mr. Purcell had now
won complete control of the firm. All core securities operations,
including the firm's institutional stock and bond business, would report
directly to him.
As for Mr. Mack, he gave a short speech to the firm's staff in New York.
After receiving a standing ovation, he was gone.
-- Randall Smith in New York contributed to this article.
Write to Charles Gasparino at charles.gasparino@wsj.com and Anita
Raghavan at anita.raghavan@wsj.com