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Financial Planning > Tax Planning

Why Morgan Stanley Passed on UBS-Paine Webber

By Janet Levaux

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As Morgan Stanley (MS) puts the ins and outs of its ’09 merger with Smith Barney behind it, CEO James Gorman is opening up on what happened during the financial crisis and what is to come.

“We had been trying to buy [UBS-owned] Paine Webber for two years,” Gorman told the Financial Times last week during a get-together with its top reps in Hawaii.

“We couldn’t succeed in agreeing on a price, because they thought it was worth more than we thought it was worth,” he explained in a story published Tuesday. “We were enamored about consolidation, but we weren’t stupid.”

Thus, instead of picking up about 8,000 advisors from UBS, Morgan Stanley grabbed a 51% stake in 12,000 reps from Citigroup, which it added to its existing advisor force of 8,400.

Of course, market weakness and technology problems did not make the going easy.

“We got kicked in the teeth for months if not years that it was going backwards in value,” Gorman told the newspaper. “If you could withstand a bit of short-term pain, it wasn’t all bad.”

And painful it was, he admits. “We had two platforms. When we did the analysis we said it would cost about $1 billion to combine it. I think it cost $1 billion in the end. We said they’d get a certain functionality, and they did get that functionality. And we said it would happen in three years, and it didn’t; it happened in four. So we were wrong by a year,” the executive said.

But while brokers and clients got major headaches, Gorman says, he was able to suffer a bit less.

“The angst that everybody was feeling I wasn’t feeling quite the same level of pain,” he said, noting that he wrote a smaller check to Citi than expected for the final 49%.

The next challenge for Morgan Stanley, now that it owns 100% of that entity, is to see how to best take advantage of the $130 billion of deposits that Smith Barney deal helped it amass. In addition, the Financial Times says, the company is looking to make “a bigger push” into some traditional banking operations.

The hope is that such steps will help the brokerage firm catch up to rival Bank of America Merrill Lynch (BAC) in terms of profits and advisor productivity.

In the most recent quarter, Morgan Stanley’s 16,426 advisors had average yearly fees and commissions (or production) of $881,000 versus $1.06 million at BofA-Merrill.

Morgan Stanley’s wealth management unit had a pretax profit level of 19%, compared with 25.6% at Merrill.

Overall, the Gorman-led group had about $3.62 billion in revenue, pretax income of $691 million and after-tax income of $423 million in Q1’14. BofA’s wealth group had sales of $4.55 billion, $1.17 billion of pretax income and $729 million of after-tax profits.  

The executive insists the firm puts a high value on its advisor-client business. When asked why, he said: “For the same reason that though everybody’s googling every back spasm they get on the Internet, they’re still going to go to their doctor for their annual checkup.”

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