Morgan Stanley Targeted by ValueAct as Core, Active Stake

Morgan Stanley is being targeted by activist Jeff Ubben’s ValueAct Capital Management, which disclosed a new 2% stake Monday, attracted by the investment bank’s post-crisis shift toward fee-based businesses.

The stake is a core, active holding, according to a ValueAct letter to its fund investors that was seen by Bloomberg. The hedge fund’s investment to-date in the New York-based bank is valued at more than $1.25 billion, according to a person familiar with the matter, who asked not to be identified as the information isn’t public.

ValueAct likes Morgan Stanley’s shift to asset-light, fee-based businesses such as wealth and investment management, as well as investment bank advisory. Those businesses now account for 80 percent of profits, up from 30 percent pre-crisis, it said in the letter. It also praised the bank’s moves to reduce lending risks and recapitalize “to withstand the most severe economic shocks.”

ValueAct dismissed focus on the bank’s quarterly trading and lending performance as “missing the forest for the trees,” and said Morgan Stanley’s Chief Executive Officer James Gorman has shifted the bank to “growing fee streams that do not require much equity capital to grow.”

Morgan Stanley rose 1.8 percent to $30.20 at 9:52 a.m. in New York Tuesday, in the first trading session since the stake was revealed.

‘Extraordinary Discount’

ValueAct acquired Morgan Stanley at about 10 times its price-earnings ratio and 0.7 times book value, which it believes is “an extraordinary discount,” according to the letter. It will “look forward to developing our relationship with management to work towards a long, successful investment,” the letter shows.

“As with any investor, we welcome ValueAct as a shareholder,” Morgan Stanley spokesman Wesley McDade said.