Morgan Stanley Stock Falls on CEO Gorman’s Exit. Why Wall Street Is Uneasy.

Shares of Morgan Stanley (ticker: MS) ticked down as much as 2.5% in Friday’s trading, outpacing the 1.6% drop in the KBW Nasdaq Bank Index (BKX). It isn’t a dramatic move, but one that suggests some uneasiness with what could be next.

Among the more cautious is veteran bank analyst Dick Bove of Odeon Capital.

“Gorman was unique. Worse, the failure to name his replacement could potentially tear Morgan Stanley apart,” Dick Bove, analyst at Odeon Capital, told Barron’s, adding that infighting among the potential candidates is a possibility. “Battlelines are now likely being drawn between the other contenders and their supporters.”

Morgan Stanley declined to comment further on Gorman’s exit Friday.

Bove said Morgan Stanley’s succession saga could get as bad as the “Darwinian” scenario that played out at
Citigroup
(then Citicorp) in the early 1980s, when three potential successors to chief executive Walter Wriston were pitted against one another in a two-year succession battle, according to reports.

But Morgan Stanley’s story doesn’t have to play out that way. In fact, the relatively mild decline in the stock suggests that while investors didn’t appreciate the unexpected news, they aren’t panicking. And many on Wall Street are taking a more optimistic view than Bove.

“I wouldn’t expect much disruption at all,” says Glenn Schorr, analyst at Evercore ISI. While companies invariably portray their management as cohesive, Schorr says that is actually true at Morgan Stanley.

Still Schorr, registered surprise at Gorman’s exit. Wall Street is generally not a fan of uncertainty—even if Gorman plans to plans to assume the role of executive chairman “for a period of time” after giving up the CEO title, giving some measure of consistency, he added.

Mike Mayo, analyst at Wells Fargo Securities, said that while the announcement isn’t a complete surprise, it is a “short-term negative” for the stock.

“A management transition often creates short-term stock weakness,” he wrote Friday. “We feel that may be the case this time given the importance of Gorman’s role in reshaping the firm over the past decade.”

Gorman took the top spot in 2010 and was instrumental in building out the bank’s asset and wealth management arms, providing a more durable source of revenue for the bank and resulting in a steeper valuation than peers. Still, the bank is known for its deep management bench. Co-presidents Ted Pick and Andy Saperstein as well as investment management head Dan Simkowitz have long been considered potential successors to Gorman—a notable fact considering that the bank’s board has identified three contenders for the position.

In February, Gorman talked with Barron’s about the importance of building out the bank’s management ranks. In recent years, the bank named a new chief financial officer, as well as heads of human resources and technology.

“A lot of these executives are in their early 40s. They’re clearly a generation beneath my generation. And I think that’s healthy,’ Gorman said at the time, adding that his focus was to ensure “you have the right people for whatever the next decade or two will throw at us.”

Investors are hoping Gorman got it right.

Write to Carleton English at [email protected]