Dan Loeb's Stake in Morgan Stanley Is 'Seminal Event': Mayo

NEW YORK ( TheStreet) -- Shares of Morgan Stanley ( MS) are up nearly 3% on Thursday afternoon, outperforming other large bank stocks.

The bank was in the news yesterday amid reports that it was in the middle of another round of layoffs, cutting 1,600 jobs or 6% of those employed in institutional securities and infrastructure support.

However, shares appear to be moving on the other significant development that took place yesterday. Third Point's Dan Loeb on Wednesday disclosed that he had taken a fresh stake in the investment bank in the fourth quarter, arguing that shares were undervalued and "should nearly double" from its current $20 level.

"Although MS has historically failed to capitalize on its strengths, its leadership currently is focused on growing its good businesses while consolidating and successfully fixing its previously troubled Wealth Management business," Loeb wrote in his letter to investors. "In 2013, we expect Morgan Stanley to tackle its other weak business, Fixed Income, Currency, and Commodities (FICC) sales and trading. Morgan Stanley's stock currently trades at a 20% discount to tangible book (down from a 35% discount when we acquired our stake at an average cost of $16.77 per share), and we view MS at these prices as a chance to buy a free call option on a promising restructuring."

Loeb cited growing strength in investment banking and advisory businesses and improving margins in its wealth management business as positives. However, "Morgan Stanley has a tougher road ahead in dealing with its FICC businesses, which are limping along with a still-bloated cost structure and anemic returns due to regulatory changes stemming from the Global Financial Crisis," he noted. The investor expects the bank to take the lead of Citigroup ( C) and UBS ( UBS) in restructuring that business.

Loeb was also critical of the bank's compensation at the board level, noting that in 2011, Morgan Stanley paid its average Director $357k, or 26% more than Citigroup's average Director ($283k) and 42% more than JPMorgan's average Director ($251k), although Morgan Stanley is a substantially smaller and simpler bank.

"We hope Morgan Stanley will show that its reinvention begins at the top, and set an example for the company by quickly revising its board practices and considering an upgrade of the composition of its board of directors to reflect best principles of corporate governance," he wrote.

Notably, sources familiar with the company's layoff plans said the latest round of cuts will be focused on "senior employees", indicative of the investment bank's desire to cut both pay and jobs.

News of Loeb's Morgan Stanley purchase was buried on Wednesday, with his battle with activist investor Bill Ackman over Herbalife taking center stage.

However, as CLSA analyst Mike Mayo noted in a Bloomberg Television interview Thursday morning, Dan Loeb's taking a stake in Morgan Stanley is a 'seminal event'. Mayo argues that activist investors who push for change can do more than regulations. "We need more Dan Loeb than we need regulators."

Morgan Stanley incidentally reports on Monday and investors can expect the focus to be on cost cuts and other restructuring efforts.

--Written by Shanthi Bharatwaj in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

More from Stocks

Video: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Video: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Stocks Trade Mixed, Energy Shares Fall on Drop in Oil Prices

Stocks Trade Mixed, Energy Shares Fall on Drop in Oil Prices

Top U.S. Regulators May Be Sowing the Seeds of the Next Financial Crisis

Top U.S. Regulators May Be Sowing the Seeds of the Next Financial Crisis

Fiat Chrysler Recalls 4.8 Million Vehicles Over Cruise Control Issue

Fiat Chrysler Recalls 4.8 Million Vehicles Over Cruise Control Issue

One Thing to Consider Over Memorial Day Weekend: Are Stocks About to Collapse?

One Thing to Consider Over Memorial Day Weekend: Are Stocks About to Collapse?