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Morgan Stanley Alum Proposes Spin-Offs, Warns of Fight

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NEW YORK (–Morgan Stanley thus far has ignored a hedge fund’s demand that it restructure, and its silence may augur a fight at the annual shareholders’ meeting of the global financial services firm, set for March 15, Riverwood, Ill.

The demand came from Copper Arch Capital LLC, New York, an equity long/short fund, in a Dec. 9 letter made public this month.

Copper Arch has more than US$1 billion in assets under management, according to its chief financial officer, Michael Manley.

The letter to Morgan Stanley, signed by Scott Sipprelle, Copper’s chairman and founder, congratulates Morgan Stanley on having served as “an agent for change in the capital markets through strategic restructuring advice” but accuses it of a failure to look at itself in the mirror “when the issue of optimal levels of performance relates to its own portfolio of businesses.”

Mr. Sipprelle wrote that Morgan Stanley ought to return the company to its core institutional securities business and should sell or spin-off ancillary operations such as retail brokerage, investment management operations and the Discover credit card.

Near the end of the letter, Mr. Sipprelle used bold letters to emphasize a warning: “Should there be no constructive steps made toward addressing our concerns, we intend to oppose strongly the re-election of each of the Directors.”

Morgan Stanley’s board consists of 10 directors, divided into three classes. Each class has a three-year term, staggered so that one class must be elected or re-elected at each annual meeting. The four directors whose term expires this year, and who will presumably either be re-elected or replaced at the upcoming meeting, are John E. Jacob, Charles F. Knight, Miles L. Marsh and Dr. Laura D’Andrea Tyson.

Mr. Sipprelle’s letter was addressed to all the members of that board, including Philip J. Purcell, the chairman and chief executive. It begins with a reminder that he knows a good deal about the company from the inside. He was employed there, at first as an analyst in investment banking in 1985, and rose to become a managing director and head of U.S. equity capital markets.

He left Morgan Stanley in 1998 to found Copper Arch, which has both an exclusive prime brokerage relationship and extensive counter-party trading relationships with Morgan Stanley. In those capacities, he writes, he has “a great respect for the integrity and skill of … the firm’s institutional securities operations.”

More recently, Copper Arch has become an investor in Morgan Stanley, although the investment remains below the 5% threshold that would require filing in regard to its ownership stake with the U.S. Securities and Exchange Commission. The letter isn’t specific about when Copper Arch began acquiring shares in Morgan Stanley, and a spokesman this week said there would be no comment beyond the letter.

Mr. Sipprelle writes that Morgan Stanley has failed to realize the synergies anticipated when the company merged with Dean Witter in 1997. There was a good deal of “giddiness” that year “over the scale of the business that had been created,” but it has since “become clear that scale can be an enemy of performance.”

This isn’t the first time that Copper Arch has played the role of shareholder activist. In February 2003 Mr. Sipprelle pressed the management of Sierra Pacific Resources Inc., Las Vegas, to consider a share buy-back program. More than a year later, Sierra Pacific did announce some debt restructuring, especially a tender offer for 8.75% notes due 2005. Michael Yackira, executive vice president and chief financial officer for Sierra Pacific, said Jan. 24 that he doesn’t believe that anything the company did was the result of actions by Mr. Sipprelle and that there was no stock buy-back.

Contact Bob Keane with questions or comments at: [email protected].


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