Introduction On February 14, 1986, the investment bank of Morgan Stanley &Company issued a preliminary prospectus for the

sale of 4,500.000 shares of its own common stock to the public at price estimated to be between $42 and $46 per share. This sale signaled a new era in the firms history, as heretofore Morgan Stanley has been organized as a partnership consisting of 111 managing directors and 143 principals. The offering raised numerous questions such as the following: 1. Why had Morgan Stanley chosen to go public rather than sell to large and well capitalized buyer? 2. Why did Morgan Stanley need external capital at all? 3. Was the offering price range appropriate? 4. How would the firm preserve an entrepreneurial spirit as public corporation?

About Morgan Stanley Group Inc,: Was founded in 1935 Organized as Corporation but resembled as Partnership firm The nature of the business is underwriting, providing financial advice, distribution and market making. Number of shares for sale to public, 19.7 million $128 million as current net capital The range of estimated price per share is $42-$46.

SWOT Analysis
Strength Competency in dealing with big and complicated equity issues Specialization in mergers and acquisition Morgan Stanley considered itself as an international securities firm Weaknesses Vulnerability to unpredictable capital requirements due to rapid growth in industry Compliance with various regulations regarding the maintenance of minimum level of Net Capital Bad mortgage problems related to the credit market will cause continued pain for lenders Opportunities Introduction of the rule which allowed corporation to keep registration statement on the shelf and quickly issue securities Threats Increased competitions among the existing firms The changing nature of the securities industry The credit market crisis that increases the cost of borrowing of financial firms

Industry Analysis Technological change in information support system Increasing concentration of competition Rising demand for highly specialized work force Innovation in the design of financial securities

Market Share of Leading Underwriters (1985, in %)

Paine Webber, 2.2 Kidder, 2.9 Shearson/Lehman, 7.1 Solomon, 17.1 Smith Barney, 1.6

Morgan, 6.8 First Boston, 13.7 Drexel, 9.5

Goldman, 10.4 Merill, 14.2

Morgan Stanley Current Strategy

1. To position itself as a full service investment bank 2. To cover the entire globe as an integrated financial system 3. To introduce new information technologies into its organization.

Goals
1. 2. 3. 4. 5. New capital, not merely a rearranged balance Improved financial flexibility Continued control by significant employees Suitable financial incentives for employees Improved financial standing and permanence of capital

Risk Faced by Morgan

Market Risk
The risk that a change in the level of one or more market prices, rates, indices, or other market factors, such as liquidity will result in losses for a position or portfolio.

Legal Risk
The risk of non compliance with applicable legal regulatory requirements and standards.

Operation Risk
Inadequate or failed internal processes, personnel resources and/or system and also external factors will result in losses to the business.

Answer to the Problem

Reason for issuance of new common stock

Public offering would enlarge and make the firms capital permanent. The buoyant nature of the stock market in early 1986

Reason for external capital requirement

Introduction of the shelf registration of the statement Quick issue of securities To enable the firm to bid for entire underwriting issue and later to sell them directly to the public In recent years, the growth of the firm had consistently exceeded forecast.

Reason for Preservation of Entrepreneurial Spirit

An agreement among the Managing Directors and Principals would prevent them from selling shares The employee-shareholders would be bound to vote their shares.

Determining market share