“A defining moment in Morgan Stanley’s history came in the early ‘Seventies when American Express made an overture for the gilt-edged merchant banker.” writes Sandra Ward in this week’s Barron’s.

“Aghast at the audacious move, then-Chairman Henry Morgan quickly nixed discussion of any deal, delivering what’s known in company lore as the ‘mess of potage’ speech, in which he declared he would never sell his birthright to such a plebeian outfit for a pittance of a price, a reference to the Biblical tale of Jacob and Esau where the starving Esau sells his birthright for a handful of lentils.”

“Some 30 years later, little besides the firm’s powerful brand name is left of the culture that Morgan claimed as his birthright. And what Morgan thought ludicrous then may make enormous sense now. Looking to keep pace amid swirling competitive pressures and unprecedented consolidation in the industry, Morgan Stanley has approached American Express about a possible merger, according to people with knowledge of the talks. The appeal: American Express’ legion of financial advisers and the $230 billion under management at American Express Financial Advisors (the former IDS), along with Amex’s high-end charge-card business, not to mention the deposit base of its banking operations.”

“On-again, off-again discussions have been held over the past year, and while nothing appears imminent, it is understood that the talks were partly behind the abrupt departure of President John Mack earlier this year. Bristling at possibly reporting to Amex’s chairman and chief executive, Kenneth Chenault, Mack opted out of the firm he helped build and lead over an almost-30-year career.”

“Such a move, however, would fit the pattern established early in the career of Morgan Stanley’s chairman and chief executive, Philip Purcell, when as a young maverick from McKinsey & Co., he pushed retailer Sears Roebuck to buy brokerage firm Dean Witter Reynolds in the early ‘Eighties and introduced the innovative Discover credit card. He later stunned Wall Street in 1997 by orchestrating the odd-couple merger of low-brow Dean Witter with high-brow Morgan Stanley. At 57, his hold on power is secure, something that became all the clearer at Mack’s departure.”

“Then again, Morgan Stanley is a far cry from the elite private partnership that proved so nurturing to Mack. By merging with Dean Witter, Morgan Stanley forever changed its profile, triggering a transformation of the financial-services industry in the process. Since then, mergers among commercial banks, investment banks, insurers and asset managers have become commonplace, creating any number of behemoths that pose a threat to the once inviolate dominance of the Big Three securities firms: Morgan Stanley, Goldman Sachs and Merrill Lynch. These three elites must now compete with a horde of scrappy newcomers for the high-margin capital-markets businesses of providing merger advice and underwriting securities issues. Indeed, Citigroup, Deutsche Bank, UBS, CSFB and J.P. Morgan Chase are all gaining market share at a surprising pace and turning a formerly exclusive enterprise into a commodity product.”

“In an industry where size and scale and access to capital will win out, Morgan Stanley, with $72 billion in market value, is determined to remain a formidable player on the global landscape. A merger with American Express, which has $52 billion in market value and is expected to earn $2.8 billion this year on revenues of $23.7 billion, would keep Morgan Stanley in the big leagues, giving it needed heft. Not only would a combination add to Morgan Stanley’s capital base, it would also strengthen its foothold in international markets and boost its share of the fast-growing asset management business.”

“In a recent interview in his spacious office suite on the 39th floor of the firm’s headquarters, high above Manhattan’s neon-coated Times Square, Purcell is expansive on the subject of expansion and consolidation. Looking past the economic crunch that has cut hard into his business, the lanky Utah native is focused on opportunities to build market share, firm in his belief that financial services will continue to be a global growth industry.”

” ‘Asset management is a big focal point now, and an important part of our business today,’ he asserts. ‘Strategically, we believe that the footprint we have in the United States — a very strong institutional business, a very strong retail business, a very strong asset- management business — is the footprint we see developing in Europe and Asia. Given that we are already very strong in the institutional business in Europe and Asia, I would say over a 10-year period, we should be developing the retail and asset management faster.’ “