Who wins at the new MSSB?

Here’s my prediction as to who will emerge as eventual winners in the Morgan Stanley Smith Barney joint venture: sign makers, business card printers and James Gorman, as well as a small circle of other top managers.

Here’s my prediction as to who will emerge as eventual winners in the Morgan Stanley Smith Barney joint venture: sign makers, business card printers and James Gorman, as well as a small circle of other top managers.
For others — advisers, support staff and clients — being associated with the new brokerage behemoth is almost certain to bring little in the way of tangible improvement over their current arrangements, and probably lots of heartache.
Yes, call me a skeptic. I can hear MSSB chairman James Gorman (not Jim, as he is swift to tell you in his tangy Australian accent) castigate me and others as being reluctant to accept change. But I say the spin put on these mega-mergers by their advocates — that only true visionaries can create these wonderful creations and that their enormous management gifts are vital to pulling it off — is getting a bit ripe.
The bottom line in brokerage firm mergers is that if the combined entity can survive until the next bull market and reduces its costs by some significant measure, it’s bound to make money.
Just how much money, though, is a question.
Brad Hintz, the respected Alliance Bernstein securities industry analyst, notes that the major synergies promised by the new MSSB joint venture will be tough to pull off.
“Turnover of brokers is always a challenge in a combination, retention packages require an acquisition to be paid for twice, and technology integration is always difficult,” he wrote in a recent report.
“This makes Bernstein question the rapidity with which the joint venture management can achieve the theoretical margin improvements from this combination.”
The magic number the Gorman team hopes to achieve is a pretax profit margin of 26.2%, up from the current 18.8% of the combined business.
Those of us who have experienced giant corporations from the inside know what those numbers mean — huge job cuts and slashed spending for technology, research and pretty much everything else.
In the new Morgan Stanley Smith Barney, look for the elimination of smaller advisers and smaller clients.
Remaining advisers and clients should get ready for months of vague responses to service requests as internal systems are reorganized. Product providers should expect the same, as they re-establish relationships and make the business case for their products yet again.
In the case of Morgan Stanley Smith Barney, the fiscal problems of Citigroup seem to be the drivers of the marriage, not magical promises of synergy.
In fact, the current financial crisis has affected Morgan Stanley as well, leading it to become a commercial bank and take billions in government bailouts — and causing Mr. Gorman to forgo a bonus this year.
But since he has proved to be a skillful cost cutter in the past, the new entity is bound to be at least somewhat more profitable than its forebears, whether or not it meets its lofty goal. Assuming the current financial crisis eventually passes and the equity markets eventually rebound, any brokerage firm still standing will benefit.
And when that happy year arrives, you can be sure of one thing: James Gorman and his immediate crew will make up for the forgone bonus of 2008.