(Bloomberg) — Morgan Stanley is being targeted by activist Jeff Ubben’s ValueAct Capital, which disclosed a new 2% stake Monday, attracted by the investment bank’s post-crisis shift toward fee-based businesses.
The stake is a core, active holding, according to a ValueAct letter to its fund investors, which was seen by Bloomberg. The hedge fund’s investment to-date in the New York-based bank is valued at more than $1.25 billion, according to a person familiar with the matter, who asked not to be identified as the information isn’t public.
ValueAct likes Morgan Stanley’s shift to asset-light, fee-based businesses such as wealth and investment management, as well as investment bank advisory. Those businesses now account for 80% of profits, up from 30% pre-crisis, it said in the letter. It also praised the bank’s moves to reduce lending risks and recapitalize “to withstand the most severe economic shocks.”
Revenue continues to fall for the industry's largest brokerages, but lending remains strong.
ValueAct dismissed focus on the bank’s quarterly trading and lending performance as “missing the forest for the trees,” and said Morgan Stanley’s CEO James Gorman has shifted the bank to “growing fee streams that do not require much equity capital to grow.”
EXTRAORDINARY DISCOUNT
ValueAct acquired Morgan Stanley at about 10 times its price-earnings ratio and 0.7 times book value, which it believes is “an extraordinary discount,” according to the letter. It will “look forward to developing our relationship with management to work towards a long, successful investment,” the letter shows.
“As with any investor, we welcome ValueAct as a shareholder,” Morgan Stanley spokesman Wesley McDade said.
The new, initial holding of 38 million shares was publicly disclosed in a 13F regulatory filing Monday, which shows Morgan Stanley stock acquired by ValueAct as of June 30.
Activist investors have, for the most part, shied away from taking significant stakes in big U.S. banks, which have large market valuations and need regulatory permission to increase dividends and buybacks. While Morgan Stanley is the smallest of the six biggest U.S. banks by assets and market value, it’s still worth about $57 billion.
LOW VALUATIONS
The sector’s weak stock performance this year has led to increased calls for activists to intervene. In January, Mike Mayo, an analyst at CLSA, raised Bank of America to a buy because he said the company’s low valuation and “lousy” efficiency increased the chance that an activist shareholder would demand a spinoff or other type of restructuring.
Despite the challenges, activists have occasionally invested in such banks -- including Morgan Stanley.
Dan Loeb’s fund Third Point took a stake in the bank in early 2012, but sold them about a year later after its shares rallied. Also in 2012, Bill Ackman’s Pershing Square Capital Management exited its stake in Citigroup, citing the impact of greater government oversight.
Last year, Trian Fund Management, the activist hedge fund co-founded by Nelson Peltz, exited its stake in boutique investment bank Lazard, after an activist campaign it first disclosed in 2012.
San Francisco-based ValueAct, which manages more than $16 billion, has influenced the direction of public companies including Microsoft Corp., Gardner Denver, Reuters, Adobe and Sara Lee.
