"We Don't Have To Have All of Our Cake Today"

By Frederick Ungeheuer/New York

During the heyday of takeover lending and junk-bond financing, the patrician investment firm Morgan Stanley was often the butt of ridicule. While more aggressive firms plunged into risky new techniques, Morgan, despite a leading role in corporate takeovers, seemed stuck in its stodgy habit of underwriting stock for blue-chip companies and selling investment-grade bonds. The new breed was playing high-stakes Monopoly, the joke went, while the stuffed shirts at Morgan were playing Trivial Pursuit. But no one is laughing at Morgan's expense anymore. The firm, founded in 1935, is the most profitable on Wall Street, posting record earnings of $443 million last year on $2.5 billion in revenues. Its payroll, with 6,700 employees, is at its fullest ever.

How did Morgan dodge the slump? While the firm handled a sizable share of leveraged buyouts and issued $14 billion in junk bonds during the late 1980s, the company chose its deals with care. (Morgan did come up short in one notable fight, however, when it assisted Paramount Communications in its failed $12.2 billion hostile bid for Time Inc. last year on the eve of the company's planned merger with Warner Communications.) Under Chairman S. Parker Gilbert, 56, the stepson of co-founder Harold Stanley, and President Richard Fisher, 53, Morgan hedged its bets by diversifying into many different fields rather than putting all its money into one or two fashionable trends. At the same time, top investment banker Robert Greenhill expanded Morgan's global reach. The firm is now engaged in businesses ranging from foreign-exchange trading in London to mergermaking in Tokyo.

Morgan has succeeded overseas by insinuating itself into the local business culture and hiring mostly local employees, a technique many Japanese firms spurned in their forays onto Wall Street. In Japan some 500 of Morgan's 600 employees are Japanese, most of them hired right out of the best schools or lured away from prominent local firms with promises of career paths to top- ranking posts. One area of expertise Morgan has brought to Japan is cross- border merger advice, a field in which the company ranks No. 1. Morgan is also prominent in Europe, where it completed $20.5 billion in cross-border bids last year. Yet Morgan avoids coming on like a Yankee juggernaut, preferring instead to work within the old-boy networks favored by many European executives.

The biggest current moneymaker for Morgan, however, is its expanding merchant-banking operations in the U.S., in which the firm puts up its own capital to help finance a deal rather than just serving as a middleman. Morgan has invested $250 million in management-led LBOs. Besides earning fees for arranging the deals, it reaped a 100% return on its money last year from dividends and the sell-off of corporate assets. Morgan's portfolio of industrial holdings includes stakes in 40 companies, including Burlington Industries, Southern Pacific Railroad and Fort Howard Paper.

Not everyone is enamored of Morgan's plunge into direct investments. Some investment-banking clients have complained because Morgan holds stakes in their competitors, which means that any confidential information supplied to Morgan might somehow find its way into a rival's hands. Even so, Morgan's clients are devoted. "They trust the integrity of the firm," says Greenhill, now Morgan's vice chairman.

Morgan Stanley's greatest strength, says a rival, has been "its ability to attract and hold the best people." That goes not only for its employees but customers as well, who appreciate the steady, patient quality of Morgan's culture. Says William Kneisel, head of corporate finance in London: "Clients like our long-term commitment. We don't feel we have to have all of our cake today."

With reporting by Helen Gibson/London and Barry Hillenbrand/Tokyo