It has been a week of change for investment bankers at Morgan Stanley. Ostensibly, its M&A bankers have arrived at Friday worse off.
On Wednesday it emerged that Paul Taubman, co-head of Morgan Stanley's investment bank, a Morgan Stanley M&A banker of 30 years and the popular figurehead of Morgan Stanley's M&A business, was leaving. Taubman's departure appeared to be the culmination of a three year acrimonious relationship with his co-head Colm Kelleher.
The New York Times reported that James Gorman, chief executive of Morgan Stanley, had finally decided that the co-head structure wasn't working: Gorman wanted only one person in charge of the investment bank and that person was Kelleher; Taubman had little choice but to leave. Henceforth, Morgan Stanley's investment bank will be headed solely by Kelleher - a former fixed income salesman with an allegedly sarcastic sense of humour.
It's not clear what Taubman will do next. Aged 51, he has spent his entire career at Morgan Stanley. The bank spoke of his exit as 'retirement', but this may be wishful thinking.
One ex-Morgan Stanley senior M&A banker with continued strong links to the firm says Morgan Stanley's M&A people were shocked at Taubman's departure. "He was seen internally as a great M&A banker and a big champion of M&A. He was very highly regarded and the manner in which he left seemed quite unplanned."
The big danger, he suggests, is that Taubman will go on to set up a boutique. An even bigger danger would be that he sets up this boutique with Simon Robey - the equally popular senior UK investment banker, who left Morgan Stanley after 25 years in September. Robey is already in the process of setting up a discreet '10 man advisory venture' according to the Financial Times. Were Robey and Taubman to combine forces, the two men could create something less discreet and more akin to a Perella Weinberg Partners or Moelis & Co.
If this eventuality came to pass, Morgan Stanley could have an M&A exodus on its hands. Its M&A bankers would almost certainly be interested in following either Taubman or Robey, suggests a headhunter in London. Morgan Stanley plans to encourage its M&A bankers to cross sell more products from across the business, and this is unlikely to go down very well. Much has been made of generalized disaffection within investment banks' M&A teams this year: “Large banks are only prepared to lend or use their balance sheets with a tiny number of key corporates,” John Axworthy, a director at Wheat Search, told us last month. “M&A teams are overstaffed as a result, but there is a lot of work out there for advisory firms.”
How likely is it that Taubman will set up on his own however? In the short term, not likely at all. During his 30 years at Morgan Stanley, Taubman never ever sold any of the stock that he was issued (thereby losing out from the 85% drop in Morgan Stanley's share price after June 2007). As a result, he is the second biggest individual shareholder in the firm, with 1.28m shares as of January 2012.
Many of these shares will be unrestricted, but others won't be. Morgan Stanley's most recent compensation report indicates that its senior executives are paid in 3 year 'at risk' cliff vesting performance stock units which can be clawed back. Last year alone, Taubman received $6.3m of his compensation in the form of restricted stock awards. Morgan Stanley is likely to have made vesting of this stock contingent upon him neither competing with the bank nor poaching its staff - for a few years at least. Taubman Robey & Co. is probably wishful thinking.
With Taubman out, Morgan Stanley's investment bank is now disproportionately in the hands of London-based European markets professionals.
Colm Kelleher, an Irishman, has been based in London since 2011. Below Kelleher, Mark Eichorn and Franck Petitgas are co-heads of investment banking. Eichorn is based in New York. Petitgas, a French ECM banker, is in London. Two thirds of Morgan Stanley's most senior investment bankers are now in the City. Moreover, we understand that there are no plans to move Kelleher back to New York in the near future.
Does this matter? Maybe not. One US M&A headhunter says Morgan Stanley's US M&A bankers have been reassured by the elevation of US bankers Eichorn and Jeff Holzschuh to the management committee.
Ominously, Taubman's departure is being taken of evidence of continued politicking within Morgan Stanley - politicking which originates with James Gorman himself.
Earlier this year, Walid Chammah, another Morgan Stanley veteran retired unceremoniously. At the time, Gorman wished him well and expressed his wishes that Chammah would remain 'part of the Morgan Stanley family.' However, some cynics point out that Chammah was once seen as a competitor for Gorman's job.
"There has been a culture over several years at Morgan Stanley of getting rid of key bankers who may be strong performers but are perceived as a threat to current management," says one US headhunter. Some senior Morgan Stanley bankers may come to question whether they want to continue in such a culture.
The head of one search boutique in London says many are likely to leave the industry entirely. "I can't tell you the number of MDs from across banking who have come to me over the past six months and saying they're taking time out. It's a real leadership brain drain," he says.