Morgan Stanley & Co., one of the few major remaining privately owned Wall Street investment banking firms, is planning to go public by selling 20 percent of the firm for about $200 million, sources said yesterday.
Sources said the decision to sell 20 percent of Morgan Stanley to the public was made because the 51-year-old firm needs to raise additional capital to support its rapidly growing trading and underwriting businesses. The other 80 percent would continue to be owned by senior executives of the firm.
The decision by Morgan Stanley follows similar decisions to sell stock to the public recently made by Baltimore's Alex. Brown & Sons and New York's Bear, Stearns & Co. Alex. Brown, founded in 1800 and believed to be the oldest investment banking firm in the nation, expects to raise about $40 million by selling 1.9 million of its shares to the public.
"Morgan Stanley made over $100 million in net profits last year; everybody is happy, and nobody at the firm is selling stock they already hold in the firm," one Morgan Stanley source said. "But we have got to have more capital. This will raise new money for the firm. Everybody agrees this is the right thing for the firm to do."
What everybody at Morgan Stanley does not agree on is how this will affect future employe compensation and the firm's ability to attract top talent. One of the strongest benefits privately held investment firms offer potential employes is that they can be compensated with a combination of cash and an ownership stake in the firm. The granting of ownership stakes as compensation no longer will be possible at Morgan Stanley after the public offering, sources said.
"This will be an important step in our plans for future growth in the era of global securities markets," Morgan Stanley Chairman S. Parker Gilbert said yesterday.
Morgan Stanley has been privately held since the firm was formed in the 1930s after the Glass-Steagall Act forced J. P. Morgan & Co. to separate its commercial banking and investment banking operations. J. P. Morgan's commercial banking operation, Morgan Guaranty Trust Co., is one of the nation's largest commercial banks.
Morgan Stanley's reputation as Wall Street's blue-chip investment banking firm, serving clients such as AT&T, has been hurt in recent years as corporations have severed traditional ties and increasingly used whichever investment banking firm could provide the best service for each transaction. During this period, investment banking firms generally have moved toward heavier reliance on securities trading operations that require a lot of capital.
Morgan Stanley has suffered during this period because its capital base has prevented the firm from venturing rapidly enough into new areas of securities trading and underwriting. In addition, the size of its capital base has forced the firm to avoid trading situations that others have grabbed, often because too much of Morgan's capital base would be exposed to risk, Morgan Stanley sources said. Many of Morgan Stanley's chief competitors have raised additional capital in recent years either by merging with larger businesses or through public offerings.
Major full-service Wall Street investment banking firms that will remain privately held after Morgan Stanley goes public later this year include Goldman, Sachs & Co., and Drexel Burnham Lambert Inc.