We believe that Morgan Stanley Dean Witter clearly has demonstrated its ability to adapt, prosper and grow in a rapidly changing and often turbulent marketplace. We believe the diversity of our revenue streams and our ability to manage risk make us less subject to market volatility. Our global commitment and expertise position us to take full advantage of the continuing trend of globalization. Our capacity for innovation enables us to serve our clients in an increasingly complex financial marketplace. And as the consolidation of the financial services industry continues, we believe we have the range of products and broad distribution channels that will enable us to continue to gain market share.
Morgan Stanley Dean Witter & Company, formed in 1997 through the merger of Morgan Stanley Group, Inc. and Dean Witter, Discover & Co., is an investment banking and retail brokerage firm. The company is made up of three primary divisions--securities, asset management, and credit services--and is one of the top retail brokerages in the United States, with more than 450 U.S. offices. The firm also has growing international operations, with more than 30 overseas branches. In addition to asset management and securities trading, Morgan Stanley Dean Witter offers corporate finance, merchant banking, and research and advisory services. The company is a leading issuer of credit cards, particularly the Discover Card.
Early Years as a Securities Brokerage: 1920s-70s
The original Dean Witter brokerage house was founded in 1924 by Dean Witter, his brother Guy, and cousin Jean. The trio started Dean Witter & Co. as a West Coast securities firm dealing in municipal and corporate bonds. They set up shop in San Francisco and, in 1928, purchased a seat on the San Francisco Stock Exchange; that exchange was incorporated later into the Pacific Stock Exchange. The company enjoyed immense success during the explosive bull market of the 1920s. In 1929, in fact, Dean Witter opened a New York office and purchased a seat on the New York Stock Exchange.
Dean Witter survived the Depression-era securities industry shakeout and even managed to post profits every year during the 1930s and into the 1940s. The company also became known as an innovator on Wall Street. For example, Dean Witter was one of the first securities firms to establish an account executive training program. The company grew rapidly during the 1950s and 1960s, establishing itself as a major U.S. brokerage house. Dean Witter died in 1969, and, the following year, Guy Witter retired, passing the top position to Jean Witter's son, William M. Witter, who became CEO of the operation. The company was taken public in 1972 with an offering of 1.5 million shares on the New York Stock Exchange. In 1977 Dean Witter purchased InterCapital Inc., an investment management firm with $200 million in assets.
At the same time that Dean Witter was rising to prominence on Wall Street, another company was making its mark on the securities brokerage business. Reynolds & Co. was started in 1931 by Richard S. Reynolds Jr., Thomas F. Stanley, and Charles H. Babcock, all members of the Reynolds family. That company also went public in the early 1970s, becoming Reynolds Securities. In 1978 Reynolds and Witter joined forces in what was then the largest merger in the history of the U.S. securities industry. Both firms were industry leaders and neither had posted a loss since they had opened their doors. The resultant company, Dean Witter Reynolds, was the fifth largest broker in the United States.
New Ownership and Diversification in the 1980s and Early 1990s
By the late 1970s, Sears, the largest retailer in the world, was facing several challenges. Its retail store operations were increasingly under fire from new competitors, particularly from discount retailers and upscale department store chains. Likewise, its well-known catalog division was threatened by a new breed of specialty catalog retailers. In short, Sears retailing strategy had become obsolete and the company was floundering. In an effort to overcome its problems, Sears experimented with a variety of fixes. During the early 1980s, for example, it decided to diversify into new businesses, including financial services. Toward that end, Sears acquired Dean Witter Reynolds in 1981 for about $600 million.
Sears hoped that Dean Witter would provide the foundation for a giant financial services network--the Sears Financial Services Group--that would be offered to consumers through the company's extensive chain of retail stores. The network would provide Sears customers with an easy way to purchase mutual funds, stocks, and insurance, and even allow them to obtain financing for homes and other purchases. To head Dean Witter, Sears chose Philip J. Purcell, a strategic planner at the Sears Chicago headquarters. Purcell moved to New York to run the operation from Dean Witter's office.
Sears decided early that Dean Witter should make a major shift in its strategy. Instead of serving both the retail and institutional sectors, it would shift its focus to the former, the individual consumer. Purcell believed the market would fuel growth in the financial services industry in the coming decade, and he felt that Sears offered the infrastructure to reach that group. Thus the strategy was relatively synergistic: Sears would create a sort of financial services supermarket aimed at the broad middle consumer market. A combination of heavy foot traffic and general goodwill toward Sears would lead millions to entrust their money with Dean Witter and its affiliates. 'A lot of people don't trust brokers, but they do trust Sears,' explained John Fallon, a Dean Witter account executive, in the December 14, 1987 Crain's Chicago Business.
Many critics regarded Sears's scheme as simplistic and illusory. 'Do consumers really want to buy socks and stocks under the same roof?' they questioned. Similarly, stockholders wondered why Sears was involving itself with financial services, when its core business was being assaulted by Wal-Mart and other aggressive contenders. In response, Sears cited its success with Allstate, an insurance company that it had started in 1931. Sears enjoyed success with that operation and hoped to replay those gains with broader financial offerings. In addition to Dean Witter, in fact, Sears purchased Coldwell Banker, a provider of mortgage and brokerage services. Sears aimed to achieve a synergy between Allstate, Coldwell, and Dean Witter that would allow the three to benefit from their complementary offerings.
During the early 1980s, Sears used its retail store network to open new Dean Witter and Coldwell Banker offices in areas of the country in which they had been nonexistent or poorly represented. After establishing a base in the local Sears store, satellite offices were spun off in surrounding neighborhoods. Sears invested millions of dollars into the Dean Witter operation during the early 1980s, opening 280 new offices between 1981 and 1986. Indeed, in 1983, Sears announced its intent to at least double Dean Witter's chain of 350 outlets during the 1980s and to establish it as a leading securities firm for individual investors. Sears initiated similar growth plans for Coldwell Banker as well.
Sears's aggressive efforts to turn its financial services division into a star performer had achieved lackluster results by the mid-1980s, however. Critics of the strategy sounded off after the stock market crash of 1987, which seemed to expose weaknesses in the division. Indeed, after focusing on building Dean Witter's retail sales, the financial services division was facing the possibility of a long-term bear market during which retail sales growth would undoubtedly wane. Worse yet, Dean Witter's position in the traditional investment banking and underwriting sectors had deteriorated rapidly since 1981. Many of its top executives and managers had jumped ship after the transition to retailing. Not surprisingly, Dean Witter's rank in the corporate debt and equity underwriting market had slipped from tenth to 15th, and investment banking accounted for less than ten percent of Witter's revenues by 1987.
Sears financial group posted a loss of $37 million in 1987 on sales of about $3.5 billion, while Sears earned $1.35 billion from $44 billion in sales during that year. Nevertheless, some contended that Dean Witter's performance was not as bad as it seemed. In fact, the overall financial services operations had posted healthy profits of $80 million just one year earlier. Furthermore, much of the 1987 loss was attributable to the Discover Card, a credit card introduced the year before by Sears, which sought to enter the growing $200 billion industry. Sears had invested $200 million into the project during 1986, with the expectation of losing money in the short term.
Discover Card had been set up as a division of Dean Witter, which was still under Purcell's direction. The main appeal of the card for consumers was that it was free; most other cards at the time charged annual fees ranging from $10 to $50. In addition, the card offered cashback bonuses and interest-free cash advances. The card was distinguished from Visa and Mastercard in that Sears controlled its brand image, features, service level, and pricing. Even though many retailers were initially slow to accept the card, within two years the card boasted more than 22 million subscribers and was accepted at 740,000 merchant outlets.
Discover's growth dropped off significantly during the late 1980s as credit card competition intensified. According to some analysts, Discover's profitability failed to live up to Sears's original expectations, and the concept received a generally lukewarm reception from the Visa/Mastercard-dominated credit card market. Nevertheless, Sears poured more than $1 billion into the project, and Discover turned its first profit in 1988. Discover's account base continued to increase past 25 million by the early 1990s as the total number of dispensed cards topped 40 million. In fact, Discover became the largest single issuer of general purpose credit cards. Its profitability remained well below that of many of its peers, but its sheer size allowed Discover to generate earnings of about $174 million annually by 1991.
Like Discover, Dean Witter's other operations experienced some challenges during the late 1980s. Although Dean Witter had nearly doubled in size between 1981 and 1989, it appeared as though Sears had failed to achieve the financial services synergy for which it had hoped. Sears announced plans to close about 200 of Dean Witter's 650 outlets, primarily those located in its department stores. Viewed as a failed attempt to capitalize on the individual financial services market, the barely profitable Dean Witter was frowned upon by frustrated Sears stockholders. In the early 1990s, however, the fortune of Dean Witter and its Discover Card began to turn.
Falling interest rates in the early 1990s sent many investors scurrying to the stock market in search of higher returns. As a result, Dean Witter's sales skyrocketed. Much of its gains were attributable to Dean Witter's emphasis on mutual funds. The company had begun investing heavily in its mutual fund offerings in the early 1980s, speculating that the funds would become the investment vehicle of choice for its target market. That strategy began to pay off in the early 1990s. Significantly, Dean Witter introduced a new family of proprietary funds (funds managed in-house) in 1992, giving it a steady stream of cash in the form of management fees as well as up-front fees charged to enter the funds. As cash began to pour in, Witter's mutual fund assets increased to more than $50 billion by 1992.
To the surprise of its critics, Dean Witter staged a major comeback in the early 1990s. In 1990 Witter posted profits of $109 million while the average Wall Street brokerage house saw a loss of $162 million. In 1991, moreover, net income from Dean Witter and its Discover division rose to $171 million and $173 million, respectively, as combined sales soared to a record $3.35 billion. Then, in 1992, total net income surpassed $400 million from revenues of $3.7 billion. Although Witter's securities operations were enjoying healthy gains, its success was also the result of big advancements by Discover, which was finally beginning to bear fruit.
As its financial services division posted solid gains during the early 1990s, the performance of Sears's core retail operations waned. By 1992, the mismanaged retail giant was suffering under a massive $38 billion debt load. In an effort to pare its debt and refocus its energies on its core business, Sears announced its intentions to sell its financial services operations. Although they were going to lose their deep-pocketed parent, many Dean Witter managers welcomed the decision to spin off the operation. Indeed, some of them felt that the Sears name was not helping their image; in 1992 Sears posted the worst performance in its 108-year history, a staggering $3.9 billion loss.
On February 22, 1993, Sears spun off 20 percent of Dean Witter and Discover into an independent, publicly traded company called Dean Witter, Discover & Co. The remaining 80 percent was spun off on June 30, 1993. During its first year of operation, Dean Witter Discover revenues rose more than 20 percent to $4.6 billion as net income reached $600 million. Moreover, the company's stock soared. Gains continued in 1994 as both credit card and securities operations continued to advance, causing many of Witter's competitors to adopt the operating strategies that they had once ridiculed. Going into the mid-1990s, Dean Witter, Discover & Co. remained the largest credit card issuer in the United States, was the third largest broker, and offered a variety of related financial and transaction processing services. In 1994, moreover, the company started a new credit card, Prime Option, aimed at the Mastercard/Visa segment of the market.
Major Changes in the Late 1990s
Heading into the second half of the decade, Dean Witter was still getting a feel for its newly established independence. The independence, however, was short-lived. As early as 1994, Dean Witter began exploring the possibility of joint partnerships with Morgan Stanley Group, Inc., a well-respected investment banking firm known for working with large and influential companies worldwide. A few years later, in 1997, the two companies announced that they would merge, creating the largest asset management company and the largest securities firm, in terms of equity capital, in the United States. The deal, valued at $10.22 billion, was finalized on May 31, 1997, and the new company was named Morgan Stanley, Dean Witter, Discover & Co. Each share of Morgan Stanley stock was converted into 1.65 shares of Dean Witter.
The two companies asserted that the merger was mutually beneficial. Morgan Stanley gained access to millions of U.S. customers through Dean Witter's extensive U.S. network of sales offices, and Dean Witter's stock offerings and investment choices were expanded considerably through Morgan Stanley. Morgan Stanley also provided Dean Witter with access to international markets. Despite the companies' insistence that the merger was an ideal fit, many industry observers remained skeptical. Journalist Peter Truell commented on the merger in the San Diego Union-Tribune: 'the new firm faces the stiff challenge of integrating Morgan Stanley's aristocratic culture ... with the meat-and-potatoes environment at Dean Witter, whose brokers ply their trade everywhere from suburban office complexes to small-town storefronts. In a way, the merger would be as if Sears and Saks Fifth Avenue decided to join together.'
The combined company shortened its name to Morgan Stanley Dean Witter & Co. (MSDW) in 1998 and worked to settle into its new organization. To strengthen its core operations of securities, asset management, and credit transaction services, the company began to divest itself of noncore businesses. MSDW sold its global custody businesses, namely Morgan Stanley Trust Company and Morgan Stanley Bank Luxembourg, S.A., to Chase Manhattan Corporation. The company also sold its Correspondent Clearing operations to NationsBanc Montgomery Securities LLC. Other divestments included MSDW's Prime Option MasterCard business, which it ran with NationsBank of Delaware, N.A.; its 73 percent stake in subsidiary SPS Transaction Services, Inc.; and some credit card receivables tied to its discontinued BRAVO Card.
Although the late 1990s were volatile years for financial markets globally, MSDW performed well and began to put to rest the doubts of industry skeptics. Total revenues for fiscal 1998, which ended November 30, were $31.13 billion, compared with fiscal 1997 sales of $27.13 billion. Profits reached a record $3.3 billion, a 27 percent jump over 1997 earnings. In addition, despite continued weak economic conditions in Europe and Asia, MSDW worked to strengthen overseas operations. In 1998 the company increased its staff in Europe by 20 percent and its staff in Asia by ten percent. In early 1999 MSDW acquired AB Asesores, the largest financial services company in Spain, and also partnered with National Bank of Kuwait SAK to offer asset management services. The company also extended its global reach to India, where it formed an alliance with JM Financial to create JM Morgan Stanley. Also in 1999 MSDW opened an investment banking branch in Argentina to better serve Latin American interests and formed an alliance with Sanwa Bank to offer mutual fund and investment products to Japanese clients.
MSDW's credit card operations continued to perform strongly, and in fiscal 1998 net income from the credit card division rose 47 percent to reach $688 million. The company launched the Discover Platinum Card in late 1998 and introduced its first credit card overseas, in the United Kingdom, in 1999. Also in 1999 more than 5.4 million new credit card accounts were established, the largest increase in one year since 1987. MSDW added to its online offerings in the late 1990s as well, launching ichoice, an online service that offered trading capabilities and broker advice, and changing the name of Discover Brokerage Direct to Morgan Stanley Dean Witter Online.
After only a few years in its new incarnation as MSDW, the company seemed to have adjusted to its new environment. MSDW reported net revenues of $22.01 billion for fiscal 1999, an increase of 34 percent over fiscal 1998. Assets under management rose from $376 billion in 1998 to $425 billion. The company's securities business, which accounted for 74 percent of total net revenues, reported record net income of $3.67 billion, a rise of 64 percent from fiscal 1998. The asset management division, which contributed ten percent of total revenues, also performed strongly, reporting net income of $455 million, an annual increase of 83 percent. Credit services enjoyed a 19 percent increase in net income over fiscal 1998, reaching a record $662 million. The global financial services leader planned to continue growing its international operations and strengthening domestic businesses in the new century, determined to live up to its goal to be 'a stable force in a turbulent world.'
Principal Subsidiaries: Morgan Stanley Dean Witter Online; NOVUS Financial Corporation; NOVUS Services, Inc.; Morgan Stanley Dean Witter Advisors Inc.; Morgan Stanley Dean Witter Insurance & Annuities; Morgan Stanley Dean Witter Investment Consulting Services; Morgan Stanley Dean Witter Managed Futures; Morgan Stanley Dean Witter Trust FSB; Morgan Stanley Dean Witter Unit Trust; Van Kampen Investments Inc.; Miller Anderson & Sherrerd, LLP; Morgan Stanley Asset Management Inc.
Principal Competitors: The Goldman Sachs Group, Inc.; Merrill Lynch & Co., Inc.; Salomon Smith Barney Holdings Inc.
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