Morgan Stanley Chief Executive John Mack on Tuesday said that, if the company's investments in businesses such as private equity and retail brokerages pay off, its profits could double in five years.
In his first major speech about strategy since taking over the investment bank in June, Mack said Morgan Stanley plans to boost profits through both acquiring businesses and investing in its existing assets.
"There's room for improvement in almost every business we're in," Mack said, speaking at the Merrill Lynch Banking and Financial Services Investor Conference in New York.
Competitors have made three times as many acquisitions over $50 million as Morgan Stanley has in recent years and the firm needs to be open to buying more businesses, Mack said.
Hedge fund managers, for example, might be worth acquiring, Mack said. The number of funds has grown explosively in recent years. Regulatory changes are forcing funds to invest in infrastructure, Mack said, which may lead some managers to sell themselves. In the commodities business, Morgan Stanley may look to invest in assets that could support its trading business, Mack said. Five years ago, the firm owned two or three power plants, he noted.
Buying a company that collects mortgage payments from retail consumers may also make sense, Mack added.
Mortgage servicing tends to grow more profitable as interest rates rise and consumers are less likely to refinance mortgages, a scenario playing out now as the Federal Reserve raises rates.
The pressure is on for Mack to increase profits. Investors upset about the firm's lagging share price lobbied then chief- executive Philip Purcell to leave and, since Mack took over, Morgan Stanley's share price has not fully recovered.
Morgan Stanley's shares have risen 5 percent since Mack took over, while the Amex Securities Broker Dealer index has risen 19 percent.
Many investors had speculated Mack would spin off or sell the bank's sluggish Discover credit card division, but the new CEO this summer told investors he was committed to the business. He also reaffirmed his support for the company's underperforming brokerage and asset management arms. Acquisitions should boost revenues, but Morgan Stanley also hopes to build through investing in its existing businesses, like its principal transactions arm, which invests the firm's own capital in private and to a lesser extent public companies.
The investment bank hopes to allocate $1 billion to principal transactions in 2006.