The Feud at the Top of Morgan Stanley

Kelleher, a gregarious former bond salesman, and Taubman, a reserved merger specialist, don't play well together. The friction between them has led to lost business opportunities for Morgan Stanley, according to former executives. Both are contenders to b Morgan Stanley via Bloomberg

By Michael J. Moore and Max Abelson

Colm Kelleher and Paul J. Taubman, co-presidents of the Institutional Securities Group at Morgan Stanley, work on opposite sides of an ocean, disagree about strategy, and share an enmity that has become the subject of company jokes.

At a meeting of more than 100 managing directors at the Ritz-Carlton Battery Park hotel in New York last year, Robert A. Kindler, the bank’s head of mergers and acquisitions and brother of stand-up comedian Andy Kindler, drew laughs and whistles when he ribbed the men about their relationship, according to two people who attended the session. “So how’s that co-head thing going?” Kindler asked, gesturing at the two men.

Neither Kelleher, 54, a gregarious former fixed-income salesman based in London, nor Taubman, 50, a reserved New York-based banker who has advised media clients on mergers, responded to the taunt, say the people, who asked not to be identified because they weren’t authorized by the bank to speak. Kelleher has been more vocal offstage, insulting Taubman in front of colleagues, according to two former Morgan Stanley executives.

The feud between the men has led to lost business opportunities, in addition to wasting colleagues’ time, according to six former executives. The Institutional Securities unit, which combines investment banking, sales, and trading, is critical: It generated $8.8 billion of revenue and $1.7 billion of profit in the first half, accounting for 79 percent of Morgan Stanley’s total earnings.

President and Chief Executive Officer James P. Gorman, who appointed the men to their posts in December 2009, will tolerate the tension between Kelleher and Taubman so long as their group performs, a current colleague says. This year, Morgan Stanley has maintained a leading position in investment banking and recovered some trading market share lost after the financial crisis. “The fact is, Institutional Securities just produced one of its strongest quarters ever in a very challenging environment, with the firm taking market share across many areas,” says Mark Lake, a company spokesman. Kelleher, Taubman, and Gorman declined to comment.

Kelleher and Taubman share a common ambition: Each sees himself as a potential future head of the company, according to three people who know them. Both are candidates to become president after Gorman, 53, gives up that title when he succeeds John J. Mack, who is retiring as chairman in January. The feud between Kelleher and Taubman may hurt their chances for advancement, four former executives say.

One of nine children who grew up in Ireland’s County Cork, Kelleher, an Oxford graduate, is fond of a daily Cuban cigar and off-color jokes, plays golf, collects modern British art, and drinks with colleagues. A former fixed-income salesman, he was chief financial officer during the 2008 financial crisis, when Morgan Stanley secretly borrowed $107 billion from the Federal Reserve, the most of any bank. He conducted business lying down on his office floor after suffering a back injury in a car accident.

Taubman, the son of an accountant, was born in New York and graduated from the University of Pennsylvania’s Wharton School in 1982, joining Morgan Stanley that year. He helped negotiate a $9 billion investment from Tokyo-based Mitsubishi UFJ Financial in September 2008 that helped the company survive the financial crisis. A former colleague describes him as a good person for a quiet, problem-solving conversation, not a chat over a beer.

Taubman and Kelleher’s relationship was rocky at least as far back as their being named co-heads, say two former executives who worked under them. The statement announcing the appointments described a shared leadership, with Kelleher “overseeing” sales and trading and Taubman “focusing” on banking. The arrangement didn’t last. A year later, Gorman moved Kelleher to London and put him directly in charge of sales and trading while giving Taubman sole responsibility for investment banking.

The men speak to each other infrequently and usually don’t coordinate their remarks at internal presentations, the colleagues say. They disagree about how aggressively to push clients for additional business after stock or bond offerings. Investment banks often pitch clients to win derivatives business, such as an interest-rate or currency swap, related to a sale of stocks or bonds. Kelleher favors seeking the additional transactions, which can bring in significant trading revenue. Taubman is more cautious about such deals, because they can place the bank in the awkward position of being on the opposite side of a trade with a client it just advised.

Along with creating obstacles to doing business, such discord is bad for morale as well. “What happens is people spend time politicking, which has some costs,” says Steven Kaplan, a professor at the University of Chicago Booth School of Business who studies corporate governance. “It’s the CEO’s or the board’s job either to try to get them to stop feuding, or you remove one.”

The bottom line: The inability of Taubman and Kelleher to get along may mean that neither man wins the president’s post at Morgan Stanley.

Moore is a reporter for Bloomberg News. Abelson is a reporter for Bloomberg News.

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Myths About China and India's Africa Race

By Anil K. Gupta and Haiyan Wang

More countries in Africa are joining the global economy. Over the last decade, the continent’s GDP expanded at an average annual rate of 5.1 percent, low compared with emerging giants like China and India but still well above the global growth rate of 2.9 percent. During this period, Africa also became far more globally integrated and saw its merchandise trade grow at an annual rate of 12.9 percent, vs. a global growth rate of 8.9 percent.

Africa’s economic ties with China and India have grown at a particularly rapid pace. This development—when put in the context of Asia’s ongoing march toward becoming the world’s economic center—has led many to believe that China and India have taken over from the West as the new economic powers in Africa. That conclusion, however, hinges on some common misconceptions about China and India’s engagement with Africa.

Myth No. 1: China and India dominate the race for Africa.

During 2000-2010, Africa’s merchandise trade with China grew at an annual rate of 29 percent (from $9 billion to $119 billion) and with India at an annual rate of 18 percent (from $7 billion to $35 billion). While these growth rates are very robust, they are building on a very low base. So far, Africa’s economic partnership with Europe dominates that with China or India. In 2010, Europe received 36 percent of Africa’s exports, compared with 13 percent for China and 4 percent for India. Over 37 percent of Africa’s total imports came from Europe, vs. 12 percent from China and 3 percent from India. In 2010, even the U.S. was ahead of China in terms of total merchandise trade with Africa.

To date, China and India also have played only a small, albeit growing, role in terms of capital investment in Africa. Each accounts for less than 5 percent of the total inbound foreign direct investment (FDI) stock in Africa, a tiny fraction of that from Europe and the U.S.

In short, as newly active players, China and India are making rapid headway in Africa. However, appearances notwithstanding, they are still far behind the developed economies—especially Europe—in terms of economic engagement with Africa.

Myth No. 2: China and India’s engagement with Africa is all about natural resources.

Many Indian companies are looking at opportunities to sell in African markets. In 2010, Indian mobile operator Bharti Airtel paid $9 billion for the African telecom operations of Kuwait-headquartered Zain. Tata Motors, India’s largest automaker, has opened an assembly operation in South Africa. Mumbai-based Essar Group is investing in the African steel sector and Godrej, another Indian conglomerate from Mumbai, is very active in Africa’s consumer goods market. Karuturi Global, the Bangalore company that is the world’s largest rose producer, has become one of Africa’s largest players in commercial agriculture and leases 1,200 square miles of land in Ethiopia. Indian companies are also very active in Africa’s emerging IT services market.

Chinese companies are also not just focused on Africa’s natural resources. China has taken a growing interest in helping build Africa’s infrastructure such as roads, railways, bridges, ports, and power stations. At the 2009 China-Africa Summit, China pledged to build 100 clean energy projects in Africa covering solar, biogas, and hydropower. It also announced the phasing in of zero import tariffs for 95 percent of products from the least developed African countries.

Both China and India are beginning to see Africa not just as a resource supplier but also as a market and as a target for capital investment in many sectors of the economy.

Myth No. 3: China and India are the new neocolonialists in Africa.

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New Delhi’s Housing Boom Hits a Snag

Taking to the streets to drum up business for suburban developments Vishwanathan/Bloomberg

By Pooja Thakur and Abhay Singh

B.N. Mishra aspired to become a suburbanite. In 2009 the New Delhi resident plunked down 2.2 million rupees ($45,800) for a three-bedroom unit in a new residential complex going up in Greater Noida, a bedroom community east of the Indian capital. Three years later, Mishra, 36, who runs a software business, is close to giving up hope that his family will ever move in. The development he bought into is caught in a legal dispute that pits builders against the villagers who once owned the land. “It has been a huge roller coaster ride,” says the first-time home buyer. “If there is no solution, I’ll have to continue with renting or buy a house that is ready.”

Elsewhere in India, protests by villagers who have been forced to sell their land to the government—usually at below-market rates—have stalled billions of dollars worth of projects, including steel mills, auto assembly plants, and highways. “The issue is a critical component of the overall investment climate,” says Dharmakirti Joshi, an economist at Crisil, the local unit of Standard & Poor’s. “I believe it will get sorted out, but if it doesn’t it will have repercussions.”

A four-story height restriction in most parts of New Delhi has made land for new residential projects scarce and expensive, driving members of India’s burgeoning middle class to more affordable areas to the south and east of the capital. In the suburbs of Greater Noida, Noida, and Gurgaon, developers are expected to deliver 439 million square feet of new housing stock over the next three years, enough for 340,000 families, according to real estate research firm P.E. Analytics. Prices for these new homes range from about $20,000 to $4 million, according to Jones Lang LaSalle India. In contrast, colonial-style bungalows along central Delhi’s tree-lined avenues can cost more than $10 million.

In Greater Noida, farmers claim they were swindled by officials in Uttar Pradesh state, who expropriated their land for industrial purposes and promised them jobs. Instead, the government sold the acreage to residential developers. In July, India’s highest court ruled that the land should be returned to the villagers. Local authorities hope to reach a compromise with the farmers that safeguards some $10 billion worth of investments.

The controversy has “shaken the developer community, because if you don’t get good title land from the government, who do you go to?” says Getamber Anand, vice-president of the Confederation of Real Estate Developers’ Associations of India and managing director of Noida-based developer ATS Infrastructure.

To tamp down resentment in the countryside, the government of Prime Minister Manmohan Singh has drafted legislation to revamp a century-old land acquisition law. Parliament is expected to vote on the bill, which defines protections for those facing government expropriation, before year-end.

Real estate broker Rohit Saxena used to spend weekends on a hot dusty road, darting between cars to distribute brochures for residential developments in Noida. Saxena says that in his best month last year he earned 1.05 million rupees, or 29 times India’s per-capita annual national income. These days, Saxena is having to make do largely on his monthly salary of 30,000 rupees, as the deals have petered out. Says Samir Jasuja, chief executive officer of P.E. Analytics: “Sales have come to a standstill because the customer doesn’t know what he is buying, whether the land belongs to the developer or not.”

The bottom line: The development of housing for 340,000 families has been slowed by disputes over land in the suburbs of New Delhi.

Thakur is a reporter for Bloomberg News. Singh is an editor for Bloomberg News.

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Oracle Eyes Industry-Specific Software Buys

By Aaron Ricadela

(Bloomberg) — Oracle Corp., facing mounting competition from smaller, “boutique” rivals, may make more deals to purchase industry-specific software companies, co-President Mark Hurd said.

Oracle is focused on so-called vertical markets, such as financial-services customers, and acquisitions could be a part of that strategy, Hurd said today in his first interview with a business publication since joining the company. Still, Redwood City, California-based Oracle doesn’t feel pressure to tap its $31.7 billion in cash to make a deal, he said.

“There’s a lot of value in these industry verticals we’ve invested in over the years,” said Hurd, referring to software for the banking, telecommunications and retailing industries. “It’s hard to beat the returns the company gets.”

Oracle, the world’s largest maker of database software, also is seeking to spur sales by appealing to budget-minded businesses. The company’s hardware and software can boost efficiency, letting customers reduce the number of servers and databases they ran, Hurd said. Oracle plans to unveil new computer systems packaged with database software and other programs at its OpenWorld conference next week in San Francisco.

The company also will release new software applications in its Fusion line at OpenWorld, stepping up competition with boutique companies that focus on specialized software applications, Hurd said. The company aims to repeat the success it’s had with last year’s crop of new products, he said.

“If you went back a year ago and looked at the amount of technology released at Oracle OpenWorld, you’d have to say it’s a tremendous yield,” Hurd said. “Next week we’ll announce even more.”

Oracle rose 81¢, or 2.8 percent, to $29.71 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have climbed 10 percent during the past 12 months.

Chief Executive Officer Larry Ellison has spent more than $40 billion on acquisitions since 2005, including last year’s $7.4 billion acquisition of computer maker Sun Microsystems Inc. The takeover spree has also added programs that let companies manage human resources, operations and other complicated computing tasks.

Ellison also introduced a new computer system, the Sparc Supercluster, at an event at the company’s headquarters today. The product includes a Sparc T4 processor that can run Oracle’s database and a user’s applications faster than older Sun machines, Ellison said at the event.

“We think lots and lots of people are going to upgrade from their current Sparc systems,” Ellison said. “This is a really fast computer.”

Hurd joined Oracle last September, a month after he was ousted as Hewlett-Packard Co.’s CEO. Hurd was replaced at Hewlett-Packard by Léo Apotheker, who was forced out himself last week and replaced by former EBay Inc. CEO Meg Whitman. Hurd declined to discuss Hewlett-Packard in today’s interview.

Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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Practical Pointers in an Anxious Age

The problems facing the world are substantial. Europe is cracking up. American manufacturing is on its heels. And it can be very hard to find a stylish navy blue suit, especially if you’re looking for details like a Savile Row-style waistband buckle. It would be easy to panic, but remain calm, not because we know the answers, but because we called people who do. We found folks with pretty good ideas about how to fix Europe (Christine Lagarde, managing director of the International Monetary Fund), save manufacturing (Dan Akerson, who runs General Motors), and find a suit (Thomas Mahon, who learned his trade on Savile Row, cutting cloth for gents such as Bryan Ferry and the Prince of Wales). We didn’t stop there. Life is far more complicated than a few crumbling continents. We also wanted to know how to network, how to run a meeting, how to spot talent, how to decant wine, and how to hack any website. And we’re particularly happy that we learned how to play basketball with the President. Hint: Do not knock him unconscious.

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