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Morgan Stanley (MS)Stock (Financial Services Industry, Investment Banks Industry)
 Morgan Stanley (NYSE:MS) is a leading U.S. investment bank and asset manager. Morgan advises large, institutional clients on how to structure and execute transactions, including mergers and acquisitions, and also provides services for debt and equity issuance. Additionally, Morgan Stanley offers asset management services to institutional and wealthy individual investors. Morgan Stanley can best be described as a firm in transition. After several years of lagging performance, culminating in a very public conflict between the then-CEO Philip Purcell and other members of senior management, the firm has undergone a massive restructuring. Over the last two years, the firm has made strategic investments in its asset management and institutional securities businesses. Morgan Stanley has also increased the profitability of its global wealth management business by 12-fold (from a profit margin of 1% to 12%) by reducing the size of its sales force and focusing on wealthier clients. The higher-risk businesses of mortgages and leveraged lending have been responsible for much of Morgan Stanley's recent growth since 2005. These same areas, however, are highly sensitive to conditions in the U.S. housing market, subprime lending industry, and debt markets, all of which have been contracting throughout 2007. Many of the firm's mortgages and mortgage-backed securities have seen their values plunge, resulting in a write-down of $9.4 billion in the fourth quarter of 2007 and a $3.5 billion quarterly net loss, the first in Morgan Stanley's history. The challenge for Morgan going forward will be to minimize exposure to further subprime fallout and focus on growing revenues from its stronger business segments.
[edit] Business Segments [edit] Institutional SecuritiesMorgan Stanley's Institutional Securities group was the most profitable segment of its business plan in 2006, with net revenues up by 38%. Institutional Securities incorporates several different businesses including Investment Banking and Trading. The Investment banking business advises companies on potential transaction, in the areas of valuation and deal structuring. This division also underwrites (guarantees the sale of) new debt and equity issues. [edit] Investment BankingMorgan Stanley's Investment banking has suffered a few set backs in the last year, due largely to the loss of talent. With the management shuffle complete and aggressive recruiting efforts well underway the expectation is that this business should prove relatively stable going forward. [edit] Global Capital MarketsMorgan Stanley is a leader in electronic trading. Electronic trading involves using computers to conduct trades rather than involving human agents. It is in many ways more efficient than regular trading. It also carries significantly lower margins. [edit] Global Wealth ManagementThis subset of Morgan Stanley focuses on providing advising services on investing and wealth planning, provides services for retirees, and offers insurance, credit, and other money lending products. Morgan Stanley provides advising services to individuals and smaller businesses but emphasizes its wealthier customers. In fact, 69% of its individual clients are households with more than $1 million. Morgan Stanley's pre-tax margins from global wealth management have traditionally underperformed but have picked up in the last few quarters, going from 2% in the middle of 2005 to 12% in the fourth quarter of 2006 and 17% in Q3 2007. In recent years, Morgan Stanley's retail brokerage margins have severely lagged its peers. At the end of 2005 Morgan Stanley's pre-tax margins for its GWM division stood at just 1% compared to its peers Merrill Lynch and Smith Barney whose margins exceeded 20%. As part of the recent restructuring, Morgan Stanley brought over James Gorman the former head of Merrill Lynch's Global Wealth Management Division. Gorman is largely credited with turning around Merrill's GWM division just a few years earlier. Over the last 2 years he has used some of the same strategies that were so effective in his previous role, namely culling unproductive advisors, adjusting the advisor pay scale to reward larger (more profitable) clients, and better segmenting clients (ensures that clients receive the right services based on their characteristics). By the end of 2006, GWM's pre-tax margins had risen to 12% and revenue/FA was up from $426,000 to $658,000; as of the third quarter of 2007, these figures had risen to 17% and $817,000, respectively, reflecting Morgan Stanley's continued efforts to improve performance in this segment.  [edit] Asset ManagementAs its name suggests this business segment provides asset management services to large institutions such as pension funds. In recent years this division has struggled as has seen significant asset outflows. To combat these trends the business has recently appointed new management in addition to bringing on new talent in the lower ranks. Additionally, it is pouring more resources into its Alternative Investments -typically higher risk higher return investments- and private equity offerings, two areas in which it has traditionally under invested.
[edit] Management Turmoil and RestructuringIn 2005 there was a very public spat among the ranks of top Management. The conflict ended with the resignation of then CEO Purcell. John Mack former Purcell's former rival for the spot of CEO was asked to return to Morgan Stanley. In the interim, Morgan Stanley experienced major attrition among its top talent. Over the last 2 years the firm has focused on rebuilding its business by recruiting new talent, investing areas such alternative investments and cutting costs. [edit] Market Trends [edit] Interest RatesInterest rates can have a significant impact on investment banks. In lower interest rate environments, companies are more likely to issue debt in order to pursue acquisitions or make other strategic investments, leading to higher levels of M&A and debt underwriting activity. Over the last over the last 4 years interest rates have been hovering near historic lows. Morgan Stanley's investment banking division has benefited from this trend through the early- to mid-2000s. In light of the recent collapse of the subprime mortgage industry, the U.S. Federal Reserve has cut rates from 5.25% in September, 2007, to 2.25% in March, 2008. This could help offset the economic turbulence that has hit Morgan Stanley's investment banking division over the past year. [edit] Housing MarketInvestment banks, particularly those with significant mortgage securitization practices, are very sensitive to the residential real estate market. Mortgage-backed securitization is the bundling of mortgages for sell to third parties. When the housing market goes down, the value of the underlying mortgages backing these securities falls as well. Moreover, the overall number of mortgages also decreases. In recent years Morgan Stanley has been increasing its exposure to MBS through the acquisition of several mortgage originators, including Virginia based subprime lender Saxton Capital in December of 2006. This acquisition came just months before the collapse of the U.S. subprime mortgage industry and subsequent housing slump. As a result of this acquisition and Morgan's holdings of subprime-backed securities, net income for fiscal year 2007 was down 57%. In August 2008, Morgan Stanley announced that it had frozen thousands of home equity credit lines due to the declining values of the properties backing them.[1] [edit] Interest RatesInterest Rates can be thought of as the cost of borrowing money. Businesses and subprime lenders are particularly sensitive to fluctuations in interest rates. As interest rates increase businesses are less likely to issue debt or equity given that the price of borrowing has increased. Interest rates have been near historic lows since 2004. This has played a significant role in driving business activities. Morgan Stanley has benefited from high levels of M&A, underwriting, and IPO activities over the last three years. [edit] Emerging MarketsInternational expansion is a leading driver of investment banking and trading business. Over the last 3 years firms like Morgan Stanley have seen its international revenues grow at 2-5 times the pace of its domestic revenues. Morgan Stanley's US revenue grew at a compound annual growth rate of 3% versus 14% for international. This growth is driven by private equity, US company expansion, and the growth of capital markets in developing countries. Also, demand for access to foreign stock markets has risen; on August 25, 2008, Morgan Stanley announced that it was the first major investment bank to enter into a "swap agreement" letting foreign investors buy stock on the Saudi stock exchange.</ref>Morgan Stanley says first in Saudi swap agreement | Reuters.com</ref> US companies often seek to expand their presences in other countries through acquisitions, leading to advisory fees for investment banks. Likewise, private equity companies are increasingly looking for international opportunities and require investment banks to take their acquisitions public. Finally, demand for capital and thus investment banking services, in developing countries like Brazil, China and India has increased exponentially over the last year and is expected to continue to grow for the foreseeable future. [edit] Litigation and RegulationThe Securities industry is one of the most highly regulated industries in the world. Morgan Stanley faces constant litigation risk across all of its businesses. That said its Global Wealth Management business often a target of law suits. Retail investors who lose money sometimes sue the firm on variety of grounds. This is especially true of non-fee based clients. [edit] CompetitionMorgan Stanley significant strides in restructuring its Global Wealth Division but still lags behind Merrill Lynch and Citigroup among all of the relevant metrics. As James Gorman continues to whip the organization into shape, Morgan Stanley may continue see increased gains against its competitors. That said it will be an uphill battle as Morgan Stanley has the smallest advisor force of the three and attracting new clients in the private wealth industry tends to be an expensive process. To a lesser extent the firm also competes with smaller players like Lazard (LAZ) and Jefferies Group (JEF).
 Morgan Stanley2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
[edit] Subprime ExposureOn November 7, 2007 Morgan Stanley announced that it expects a $3.7 billion loss on U.S. subprime exposure which will reduce fourth-quarter earnings by about $2.5 billion. Morgan Stanley did reduce its exposure to subprime mortgages from $10.4 billion in August 2007 to $6 billion as of October 31. In addition, Morgan Stanley has reduced its exposure to collateralized debt obligations from $12.3 billion on August 31, 2007 to $9.3 billion as of October 31.[12] Morgan Stanley's actual write down was lower than what investors expected after Citibank and Merrill Lynch dropped a bomb on the financial markets by announcing the extent of their exposure to subprime debt. To reassure investors, on November 9, 2007, Morgan Stanley's Trust FSB unit said it had $6.7 billion in highly-rated subprime-related securities in their investment portfolio as of October 31, 2007, implying that further write-downs are unlikely. The Trust FSB unit emphasized that their portfolio doesn't contain any subprime whole loans, subprime residuals or collateralized debt obligations (CDOs).[13] [edit] References
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