RCMP

1
Morgan Stanley

• RCMP
• Gleb Zarkh - Dave Wetherell - Kate Dong
• April 10th, 2007

2
Outline

• Introduction
• Economics
• Equity Analysis

3
Introduction

• History
• Business
• Holdings

4
History

• 1934 Glass- Steagell Act Morgan Stanley? I-Bank
• 1971 Establish MA Division Enter Sales
  Trading
• 1977 Establish Private Wealth Mgmt. Division
• Merge with Shuman (Brokerage firm)
  
• 1986 Sears launches Discover Card
• 1997 Merger with Dean Witter and Discover
• 2002 Prices largest Russian stock offering
• 2005 Advises largest Chinese IPO to date
• 2006 Opens office in Dubai (First in Middle
  East)

5
Management

• CEO Philip J. Purcell (1997- 2005) Former Dean
  Witter Discover CEO
• Underperformed expectations as merged firm
• Eight former executives send letter to Board to
  replace Purcell
• CEO John Mack (2005- Present) President 1997-
  2001
• - Long career (about 30 years) at Morgan
  Stanley
• - Investment banking background

6
Management (2)

• April 1st 2007 Corporate Governance Quotient
  (CGQ) is better than 65.2 of SP 500 companies
  and 90.6 of Diversified Financials companies.
• CSQ
• Board of Directors
• Audit
• Anti- takeover provisions
• Executive compensation

7
Introduction

• History
• Business
• Holdings

8
Business Segments

• Institutional Securities
• Global Wealth Management
• Asset Management
• Discover

9
Breakdown
10
Institutional Securities

• Investment banking
• -Capital raising
• -Corporate lending
• -Financial advisory (MA, restructuring,real
  estate, project finance)
• Sales,trading,financing and market-making
  activities
• -Equity securities and related products
• -Fixed income securities and related products
• Other activities
• -Benchmark indices and risk management
  analytics
• -Research
• -Investments

11
Investment Banking Rankings
12
Global Wealth Management

• Clients
• -Individuals
• -Small-to-medium size business and
  institutions
• Products and Services
• -Brokerage and investment advisory services
• -Financial and wealth planning services
• -Annuity and insurance products
• -Credit and other lending products
• -Banking and cash management
• -Retirement plan services
• -Trust services

13
Asset Management

• Global asset management products and services
• - Equity
• - Fixed income
• - Alternatives
• - Private Equity
• Three principal distribution channels
• - Proprietary channel ? MS representatives
• - Non-proprietary channel? third-party
  broker-dealers,banks, financial planners and
  other intermediaries
• - Institutional sales

14
Asset Management Rankings
15
Discover

• Discover financial services
• -Discover_at_-branded cards
• -Related consumer finance products and
  services
• Discover network
• - A network of merchants and cash access
  locations primarily in the U.S.
• -transaction network for Discover _at_ Network
  branded cards
• PULSE_at_EFT association LP (PULSE)
• - An automated teller machine /debit and
  electronic funds transfer network
• Consumer banking group international
• -MS branded and affinity credit cards and
  other consumer finance products and services in
  the U.K.
• -Credit cards issued on the mastercard
  network

Spin off in 3Q 2007 Tax- free dividend to
shareholders
16
Strong Financial Performance
17
Business Global Distribution Over 600 Offices in
31 Countries
18
Global Breakdown
19
Introduction

• History
• Business
• Holdings

20
Holdings

• 400 Shares
• Bought April 11th, 2001
• Paid 57.19
• Initial Value 22,876
• Current of Portfolio 10
• Current Price 80.30
• Gain 9,244 (40.4 )

21
Portfolio Composition
Total Financials 23
22
Correlation Matrix
Market Correlation
23
Outline

• Introduction
• Economics
• Equity Analysis

24
Economics

• 75 of Profit from Institutional Securities
• 60 from Americas
• Fragmented industry
• MS 2nd largest w/ 6.7 Global Market Share
• Maximize margins by Streamlining
• MS outsourcing

Source Datamonitor
25
Drivers

• Key players are in U.S. and driven by current MA
  activity Equity Segment
• U.S. contributes approximately 53 of sectors
  value
• Asia expected to increase in importance
• Expansion slowing down
• Still expected to be about 12.5

Source Datamonitor
26
Smaller Segment

• Global Wealth/Asset Management
• Roughly 10 of BT Profits
• Growth forecasted to decelerate
• E(g) 2007 4.2

Source Datamonitor
27

• The case for global decoupling concludes that
  world GDP growth which surged at a 30-year high
  of 4.9 over the past four years will barely
  skip a beat in 2007.
• --- Stephen Roach, Chief Economist of MS

28

• Expect IPO market to be active esp. in Fixed
  Income IPOs
• 48 of Institutional Securities Revenue
• Overall outlook good for big players

Sources Valueline Industry Reports MS
Presentation Credit Suisse Financial
Markets Conference
29
Outline

• Introduction
• Economics
• Equity Analysis

30
Equity Analysis

• Multiples Approach
• Modeling and Forecasting
• Recommendation

31
Multiples
P/E in line DY low but expected to grow after
spin-off

32
Valuations

• Dividends and Earnings growing faster than price
• P/E DY Reflect ST

33
Position

• HOWEVER!
• Sell off, not good.

34
Equity Analysis

• Introduction
• Modeling and Forecasting
• Recommendation

35
Modeling and Forecasting(1)With Discover

• Assumptions
• Beta 1.38
• Risk Free Rate 4.55
• Market Risk Premium 6
• CAPM 12.83
• Growth Rate 3.5

• Value per share (with Discover)

36
Modeling and Forecasting(2)Without Discover

• Assumptions
• Beta 1.20
• Risk Free Rate 4.55
• Market Risk Premium 6.
• CAPM 11.75
• Growth Rate 3.5

• Value per share (without Discover)

37
Recommendation

• Hold
• Discover Spin-off will add value
• Shift to Focus on Investment Banking
• Good Future Business Prospects
• Good Global Positioning
• Strong Management

38
Q A?
39
Thank you!
RCMP Gleb Zarkh emailgzarkh2_at_uiuc.edu David
Wetherell Bo (Kate) Dong Email
katedong_at_gmail.com
40
Citations

• Yahoo Finance. April 7th, 2007.
  http//finance.yahoo.com/q/pr?sMS
• Thompson Financial. April 8th, 2007.
  http//www.thomson.com/solutions/financial/investb
  ank/leaguetable_home/
• 2006 Morgan Stanley Annual Report. April 8th,
  2007. http//www.morganstanley.com/about/ir/shareh
  older/10k2006/10k11302006.pdf

• Global Investment Banking Brokerage,
  Datamonitor, (Apr. 2006), available at
  lthttp//www.datamonitor.com/gt (last visited Apr.
  8, 2007).
• Global Asset Management Custody Banks,
  Datamonitor, (Apr. 2006), available at
  lthttp//www.datamonitor.com/gt (last visited Apr.
  8, 2007).
• Stephen S. Roach, Spillovers versus Linkages,
  Morgan Stanley Global Economic Forum, (Apr. 9,
  2007), available at lthttp//www.morganstanley.com
  /views/gef/archive/2007/20070409-Mon.htmlgt (last
  visited Apr. 9, 2007).
• Tom Nikic, Securities Brokerage Industry,
  Value Line Publishing, Inc., (Jan. 26, 2007),
  available at lt http//www.valueline.com/gt (last
  visited Apr. 8, 2007).
• Tom Nikic, Morgan Stanley, Value Line
  Publishing, Inc., (Jan. 26, 2007), available at lt
  http//www.valueline.com/gt (last visited Apr. 8,
  2007).
• David H. Sidwell John A. Shapiro, Credit
  Suisse Financial Services Conference, Morgan
  Stanley, (Feb. 7, 2007), available at
  lthttp//www.morganstanley.com/about/ir/02072007dis
  c.htmlgt (last visited Apr. 8, 2007).
• Reuters Research Inc., Morgan Stanley
  Competitors Report, OneSource Information
  Services, Inc., (Apr. 2007), available at lt
  http//businessbrowser.onesource.com/HomePage.aspgt
  (last visited Apr. 8, 2007).