As we’ve watched the Wall Street Journal chronicle the problems with Bank of America’s integration of Merrill Lynch’s retail brokers, we’ve assumed that competitors would be going as hard as possible after BofA and Merrill clients. We figured those competitors would succeed, too, because our research is full of examples of customers being poached during transitions such as those that follow a merger. Now, though, a WSJ article describes a strategy by Morgan Stanley that may be too aggressive.
The article says Morgan Stanley wants to combine its brokerage operations with those of Citigroup’s Smith Barney, to become the biggest retail broker. There are several problems, though, even beyond the sorts of culture clashes and other formidable integration problems that have afflicted BofA and Merrill, as well as many, many others.
History shows that joint ventures such as the one Morgan Stanley contemplates are messy to manage. (A WSJ blogger describes potential problems in detail here.) Research also shows that combinations tend to work better when the larger or more accomplished company is the buyer, but in this case Morgan Stanley has the much smaller brokerage operations.
In addition, the combination seems to be relying on synergies that have been shown not to exist. The WSJ says Morgan Stanley is counting on having its mutual funds and other products pushed by a much larger sales force, but something has to give here. Either the sales force will push the Morgan Stanley products and find its objectivity questioned, or the sales force will decide it has to do right by the clients and find ways not to promote the Morgan Stanley products. Citigroup, among others, has found that, in Wall Street parlance, being the manufacturer and having the sales force doesn’t create any synergies. It’s better to have one side or the other but not both.
Besides, this isn’t a great time to be in the retail brokerage business, and may not be for some time. The Madoff scandal has made investors nervous about investment managers. The rah-rah advice from Wall Street that made it harder for people to see the financial crisis coming has made investors skeptical of investment advice. Some prominent critics of Wall Street, such as Vanguard founder Jack Bogle, are even using the crisis to argue that there should be a fundamental restructuring of Wall Street that would remove most of the layers of people who take a cut of each transaction–hardly a good omen for brokers and their commissions.
Now, Morgan Stanley will surely argue that the uncertainties in today’s market increase the need for good advice. In addition, Morgan Stanley could be getting assets relatively cheaply, because Citigroup is in such turmoil that it’s desperate to sell assets such as Smith Barney. In any case, the valuations in the WSJ piece suggest that Morgan Stanley isn’t paying a premium for Smith Barney, thus avoiding one of the common mistakes in mergers and acquisitions.
Still, our research into the consolidation of industries suggests that it’s often better to sit on the sidelines and let other people deal with the headaches that come from combining operations in stressful times. Morgan Stanley could steal plenty of business from BofA and Merrill even without adding Smith Barney’s brokers.
