For the second year Morgan Stanley Dean Witter wins our award for best investment bank, for two reasons. First, it continues to have, and build on, the broadest and most successful franchises in the highest margin areas of corporate finance: its secondary and primary equities business is as strong as any; its debt markets business, always solid, is improving; and in M&A it took part in 34% of all major transactions last year.
Morgan Stanley has built this largely internally from a strong domestic base.
Analysts like its broad mix of businesses, and of mandates within each business line. “We tend to be consistently strong across product lines,” says Joe Perella, head of Morgan Stanley’s worldwide investment banking division. “And the last 12 months have been the real test, especially in the tech sector, where the market first soared, and then crashed. Our strategy was to lead in this sector, and we have managed to achieve this without falling victim to the initial euphoria by underwriting anything.”
In this regard, Perella sees this year’s award as a vindication of what he told Euromoney when the firm won last year. “I was reading the write-up from last year, and I think we’ve been proven right. I’d say pretty much the same thing this time around.” Perella seizes on one comment in particular: “We want to make money, but we only want to do it in a high-quality manner. So we tend to be very careful about what we say can and can’t be done. And that’s why you don’t see a lot of botched deals from Morgan Stanley.”
This is the second factor contributing to Morgan Stanley winning again this year: in a year of volatile markets, it has managed to avoid most of the pitfalls. It has had a few embarrassments, but the biggest criticism it faces in the troubled IPO market is getting the best aftermarket performance by pricing deals slightly lower than they might have been.
But Morgan Stanley has not made a hash of things as one or two competitors have. Goldman Sachs especially has suffered from trying to dominate the business-to-consumer internet sector, one in which institutional investors were losing interest several months before the Nasdaq crash in April. John Anda, co-head of equity capital markets at Morgan Stanley, says the bank’s record is a result of “the success of our quality screen. We have chosen to underwrite only those deals which we regard as being the long-term winners.”
The golden boy of the late 1990s, Merrill Lynch, although still a force with many talented bankers, is no longer regarded as the powerhouse it once was. And neither Merrill nor Goldman get the plaudits from analysts that Morgan Stanley does. Goldman still has a private firm mentality, Merrill is still perceived as struggling with management issues.
The strength of Morgan Stanley’s investment banking teams is undeniable. Take its tech banking franchise. Four years ago the doom merchants were predicting its demise after tech head Frank Quattrone jumped to Deutsche Bank (and two years later to CSFB). Morgan Stanley has long claimed not to favour the star banker approach, and this appears to be true: the firm is the top underwriter of tech-related IPOs in the US, and by a mixture of luck and judgement has minimized the bad deals it underwrote, instead taking public firms that appear to be longer-term winners, such as the $284 million IPO for Sycamore, and, last November, the $2.2 billion IPO for Agilent Technologies, the largest Silicon Valley IPO to date.
But Morgan Stanley does not just do tech deals. It underwrote the largest ever US IPO, the $5.47 billion November 1999 deal for United Parcel Service.
In M&A the bank usually lags behind Goldman, but if 2000 is anything to go by, it’s picking up some more momentum, beating its rival thus far in the league tables. Morgan Stanley has an impressive overseas franchise, with more than half M&A revenues coming from outside the US, and for Perella even a lost battle can become a success. “We acted as defence for Mannesmann in its battle against the hostile bid from Vodafone,” he says. “Some might say we lost the battle, but by the end we had managed to obtain 130% more for the shareholders than the pre-bid price.” And the mandate was just part of a long-standing relationship. “We worked for Mannesmann on its acquisition of Orange, in its defence against Vodafone and in selling its auto business to Siemens.”
One area where Morgan Stanley has been rather quiet compared to its peers is in adapting the firm to e-commerce. Merrill and Goldman invested in as many ECNs as they could last year, and while virtually every debt markets house paraded a series of more-or-less similar on-line debt underwriting products earlier this year, Morgan Stanley has stayed out of the limelight. Many rivals now have a myriad of cross-holdings to manage in companies that have yet to produce.
Now Morgan Stanley is beginning to go more public: its forex co-head, Paul Kimball, is chairman of forex multi-bank platform FXall.com, the bank is one of the founder members with Merrill and Goldman of BondBook, a bond trading site with ambitions to become a bond exchange, and in Europe has linked up with OM to set up Jiway, a stock routing system for retail equity orders.
And as Perella points out, Morgan Stanley is the leader in advising business-to-business platforms. “We’re looking to partner with our clients as strategic participants in their transformations. So we are investing in, as well as advising, many of the B2B platforms out there.” Morgan Stanley advised Ford and General Motors on its platform with DaimlerChrysler, and was adviser to all the participants in each of the paper, oil, aerospace, utilities and chemicals platforms. “We’ve been involved in 95% of these,” says Perella.
The experience gained on these – including how regulators and anti-trust boards view them – could be crucial in adapting the investment bank to the internet.
