| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- COVER STORY
Morgan Stanley: The Deal Machine (int'l edition) How Morgan Stanley beat its European rivals in the race to reengineer the Continent's corporations Top dealmakers live for showdowns. That is certainly true of Michael Zaoui--Morgan Stanley Dean Witter & Co.'s (MWD) European mergers chief has probably been in more epic duels on the Continent than any other investment banker this year. He brought in French entrepreneur Francois Pinault as a white knight to defeat the designs of luxury goods baron Bernard Arnault on Italy's Gucci Group. Then, in a six-month struggle, he helped kill Banque Nationale de Paris' hostile bid for crosstown rival Societe Generale. He was on the losing side of Paris-based oil giant Elf's battle with TotalFina, but helped win an extra $5 billion for Elf's shareholders. A 14-year Morgan Stanley veteran, Zaoui admits to being frazzled by a brutal schedule of all-nighters that has kept him away from his wife and two children. But the 42-year-old French national, who was born in Morocco and educated at elite French schools and Harvard business school, also relishes his firm's role in what are likely to be remembered as landmark European business battles. ''I would hate not to be involved in such fights,'' he says. ''Any true professional has to be in them.'' Zaoui is just one of the stars from American banks playing a crucial role in the economic changes sweeping Europe. He and his colleagues are, quite literally, reengineering Europe Inc. through a powerful wave of mergers, spin-offs, and buyouts. Taking advantage of the euro, they're also expanding and redefining Europe's capital markets--a makeover that will affect corporations and shareholders for decades to come. Not long ago, it would have been unthinkable for an American bank to be on the inside of Europe's most sensitive corporate maneuverings. The merger market then was a shadow of what it is now, and the juiciest business went to local advisers, such as France's Lazard Freres & Co. and Italy's Mediobanca. Investment banking, European-style, was a slower-paced, clubbier world. AGE OF THE DEAL. But Morgan Stanley and other American investment banks are taking over a market that now rivals the U.S. in size. Mergers in Europe will likely come to more than $1 trillion this year. The launch of the euro is pushing corporate debt issues to record heights, and equity offerings are blossoming like Paris in the spring. Morgan Stanley is getting a hefty cut of all three revenue streams. Recent rankings place it first in European equity offerings, second in mergers and acquisitions, and second in issuing debt (table, page 26). As Europe launches its own Age of the Deal, it's clear that the Darwinian struggle for supremacy in European investment banking is largely over. Morgan Stanley and Goldman, Sachs & Co. (GS) are winners, with Merrill Lynch & Co. (MER) still a strong contender. British merchant banks have almost vanished from the scene, handicapped by their narrow focus and lack of capital. None of the European players is strong across the board. The U.S.-based but Swiss-owned Credit Suisse First Boston is up and coming. Deutsche Bank and UBS are active in equity and debt markets, but lagging in the key M&A area. How did the U.S. investment banks steal a march on their European rivals? And how did they gain such sweeping influence on the Continent? Morgan Stanley recently opened the doors of its European operations to BUSINESS WEEK, offering a rare look at the inner workings of a formidable financial institution. What emerges is a case study of the transformation of European capital markets. But Morgan Stanley's story also shows how, over two decades, an American outsider adapted its business to European realities. It's a strategy built as much on financial firepower as on the close client relationships nurtured since Morgan Stanley based its European operations in London in 1977. With competition soaring and deal mania hitting Europe, many European CEOs today need a powerful financial institution that can place their company's securities around the globe. They want a bank that can tell them how to fight a takeover battle, design huge financings, and is willing to put its own capital on the line for them. Meanwhile, with North American pension funds and other restive foreign shareholders now owning big chunks of Continental companies, European bosses need an adviser who can tell them how their moves will go over with shareholders. Morgan Stanley's bankers ''have more experience than we have--it's not the first time they've been in these situations,'' says Gilbert Mittler, managing director of Fortis, the Belgian-Dutch commercial bank. Morgan Stanley has probably prepared for this moment more than any other U.S. investment bank. It has been carefully developing its now 3,800 strong European staff and its client base since the late 1970s. While the firm has brought in Americans such as high-yield pro Alan Jones and high-tech banker Dhiren H. Shah to develop new areas, most of its top executives in Europe are European nationals or North Americans who have lived in Europe for a decade or more. ''I've always felt at home here,'' says Jerker M. Johansson, a Swedish national who is chief operating officer of the European equities business. ''I have never felt it to be a disadvantage not to be an American.'' More important, Johansson and other key players have won the trust of high-profile clients, from the controversial Formula 1 racing boss Bernie Ecclestone to the powerful Wallenberg family in Sweden. ''Morgan Stanley has taken a very long view that is now paying off in spades,'' says Alan W. Morgan, who heads the European financial services practice at McKinsey & Co. in London. The bank's European profits were a satisfying $1.08 billion last year on revenues of $2.8 billion--more than any U.S. investment bank in the region. Indeed, European profits more than doubled last year, equaling all of Morgan Stanley's 1996 earnings. Such strong results have spurred a power shift inside the bank. Two London-based bankers, Simon Robey and Michael D. Uva, were recently named global co-heads of M&A and corporate finance, respectively. Insiders say the appointments will give the European operation more clout at the corporate table when strategy and compensation decisions are made. To understand how this American outsider became the ultimate insider, you only have to visit Morgan Stanley's Paris office. Perhaps no country's corporations have been more suspicious of American-style capitalism and investment bankers than those in France. But Morgan Stanley laid the groundwork for the role it is now playing in France today by hiring French nationals such as Andre Francois-Poncet, now co-head of the Paris office, in 1984. A product of the country's elite and a Harvard business school graduate, Francois-Poncet has known some of France's top civil servants since they played together in short pants. But even his pedigree didn't win Morgan Stanley instant entree. Francois-Poncet recalls ''going through the telephone book'' in the 1980s to try to talk his way into power suites. The legwork has paid off, and now Francois-Poncet has CEOs calling him to do deals. ''There has been a huge change in clients' perceptions of what a global financial firm can do for them,'' the 40-year-old banker notes. INSIDE ADVANTAGE. Another key player in Paris is Patrice Vial, who was the top Finance Ministry civil servant under Prime Minister Edouard Balladur. It used to be that top bureaucrats like him never considered a stint with the distrusted Americans. But Vial, now 51, saw big opportunities. ''I thought I would bring an inside knowledge of the system to the capabilities of an investment bank,'' he says. He joined up in 1996. With such members of the establishment in-house, Morgan Stanley is just as much an insider in France as those perennial insiders, Lazard and the Rothschilds. That may have helped them persuade the French government that BNP should be forced to give up the 37% minority stake it acquired in Societe Generale in the takeover battle. The bank also brings with it skill in distributing securities and managing stock offerings that the French banks can't match. This year, it came up with an unusual $827 million convertible bond for Suez Lyonnaise des Eaux that was exchangeable for shares the conglomerate held in insurer AXA. The issue, Europe's first zero-coupon exchangeable bond, allowed Suez to raise funds with no cash outlay. Such deals have helped Morgan Stanley score big in France this year. The bank has advised on $174 billion in French mergers, well ahead of second-place Goldman Sachs. It also leads in international equity offerings, with some $3.9 billion, and is the leading foreign bank in French corporate bond offerings. Other countries where the bank is strong include Britain and Belgium. Morgan Stanley has also cleaned up in the hot Scandinavian deal market, thanks to strong relationships built up by Vice-Chairman John Hepburn with the Wallenberg family and other key industrialists. Hepburn, based in London since 1977, often attends games of the minor league hockey team he owns in Guildford, southwest of London. But the maestro of the bank's multifaceted assault on Europe is John J. Studzinski, head of European investment banking. Known as ''Studz,'' Studzinski is a 43-year-old American, a graduate of the elite St. Paul's School in Concord, N.H., and Bowdoin College. He first came to London 15 years ago and worked himself deeply into the European fabric through tireless socializing and charitable activities. An eclectic banker who is friendly with Elton John and has had tea with the Queen Mother, Studzinski also works Saturday nights in a London homeless shelter. Studzinski's colleagues credit him for the bank's strong track record in retaining its people. He encourages a team approach that contrasts with the individualism at some other banks. Profits generated from a piece of business are allocated to each of the departments that works on it. Today's deals are rarely done just by the M&A experts. Instead, the solutions that Morgan Stanley devises for clients' complex financial problems may involve real estate and securitization specialists, equity pros, and high-yield mavens. ''If we had tried to treat our businesses as fiefdoms, we wouldn't have accomplished a quarter of what we have,'' says John A. Carrafiel, head of European real estate. Although saddled with administrative duties, Studzinski still finds time to counsel CEOs--an activity he likens to listening to confession. Among his biggest fans is Peter Harf, a German businessman who has built Dutch-based perfume-and-household-products company Joh. A. Benkhiser into a $3 billion giant through about 35 acquisitions in the U.S. and Europe. Morgan Stanley advised the company on most of them. ''Everything major I do, I discuss with John,'' Harf says. ''Often he comes up with five deals. Other times he says: 'Peter, let's not pursue this.' That's the kind of banker I love.'' For Studzinski and his colleagues, Europe is a once-in-a-lifetime opportunity. Not only are Morgan Stanley's top bankers likely to make more than $2.5 million each this year, they also see themselves as pioneers in reshaping Europe's corporate landscape and financial markets. They expect tremendous growth in the issuance of European securities over the next few years since the potential of the region's capital markets has barely been tapped. For instance, a recent study by Donaldson, Lufkin, & Jenrette Inc. (DLJ) estimates that Europe has the capacity to issue an additional $4.6 trillion in equities. That's because the value of equity markets in Germany, France, Italy, and Spain, as a percentage of gross domestic product, is still far below that of the U.S. As it beats the drum for new business, Morgan Stanley is also trying to create a unified European capital market comparable to that of the U.S. It is helping institutional fund managers rapidly switch $100 million or larger portfolios out of domestic stocks and into euro zone-weighted portfolios. It is hammering away at the national stock exchanges to become more efficient so that bigger, more complex, and more lucrative transactions can be put through them. And the bank is backing alternative electronic exchanges such as TradePoint Systems and Easdaq. TURNING UP THE HEAT. In the next few years, Morgan Stanley in Europe plans to branch out from the securities business into a broad-based financial services company as it has in the U.S. through its 1997 merger with Morgan Stanley Dean Witter and Discover. The idea is to provide more stable sources of revenue. It is adding firepower in asset management, pushing mutual funds, private banking, and institutional fund management. It acquired a Spanish retail broker, AB Asesores, last year for some $300 million and might make a similar move in Italy. It has just launched a credit card in Britain and is sizing up the Spanish market. Eventually, Morgan Stanley may roll out an online brokerage in Europe as it is now doing in the U.S. Morgan Stanley also aims to turn up the heat on its investment banking competitors. Its huge deal flow can support a broad array of high-priced experts ranging from highly regarded pharmaceutical analysts to a new team of Internet whizzes. Studzinski says second-tier players can't match that: ''The barriers to entry are going up.'' Morgan Stanley uses its reputation as a deal adviser as an entree to bosses to sell them other, even more lucrative services. M&A fees on a billion dollar deal may be around $4 million, for instance. But if Morgan Stanley also finances the move with a high-yield bond, it could add another 2% to 3% in fees, or $20 million. An equity offering further down the road could bring another 2% to 3%. Morgan Stanley insiders say that the bank is increasingly negotiating package deals with companies rather than hitting them up for each transaction. Morgan Stanley's bankers are constantly looking for fast expanding clients that require lots of financing but won't go bust. One of the most capital-hungry entrepreneurs in Europe is Barclay Knapp, a 42-year-old American who is becoming a key player in the British cable industry. In October, 1998, when the European high-yield market was closed after the Russia crisis, Morgan Stanley went ahead and floated a $900 million high-yield bond for Knapp's NTL Inc., snatching the business from Chase Manhattan. In July, Morgan Stanley's decision to stake Knapp up to $11 billion helped him grab the consumer portion of Cable & Wireless Communications (CWZ), a deal that made NTL a market leader. In the end, Knapp got $5 billion from France Telecom (FTE), which bought a 25% stake in NTL, but Morgan Stanley still chipped in a hefty $3 billion. Fees from the Cable & Wireless deal may reach $50 million. This is the kind of high-stakes game where multibillion-dollar decisions must be made overnight. ''If you read the market wrong or are too relaxed in your view, they will look for someone else who is more aggressive,'' says John S. Wotowicz, head of European high-yield business. Morgan Stanley thrives on working out such complex problems. When Irish aircraft-leasing giant GPA--now AerFlis Ltd.--was battling a mountain of debt, Morgan Stanley came up with the novel suggestion of securitizing the leases on some 229 aircraft for $4.5 billion. The firm, says AerFlis Chairman Dennis Stevenson, worked on the deal for two years, taking a considerable risk with its reputation. The market accepted the paper smoothly in 1996, and the bank made close to $40 million. ''They earned every penny they made,'' says Stevenson. Impressive stuff, but the race never ends. One market where Morgan Stanley is weak is Germany, where it is running second to Goldman Sachs. Goldman went after the German market by sending over crack Americans. They in turn trained German speakers from McKinsey, including managing director Alexander Dibelius. The strategy has paid off with such high-profile deals as Daimler Benz's acquisition of Chrysler and Deutsche Bank's purchase of Bankers Trust. Goldman's German successes have helped take the firm to the top of the European rankings for M&A deals this year, knocking Morgan Stanley from the No. 1 spot it held in 1998. Yet Morgan Stanley bankers are hopeful that the tide may turn now that Goldman has wound up on the wrong side of some high-profile deals, such as Deutsche Telekom's ill-fated effort to acquire Telecom Italia earlier this year. Indeed, the bank is advising German mobile-phone powerhouse Mannesmann (MNNSY) in its negotiations to acquire Britain's No. 3 mobile operator, Orange PLC. Other potential pitfalls lie ahead. A collapse of the euro or slowdown of Europe's shift toward bigger, more transparent securities markets could damage Morgan Stanley because the firm has placed such big bets on Europe. It costs $1 million per hour to run the operation, says a senior executive. A downturn in business could hurt badly. Senior Morgan Stanley bankers also worry that Internet startups, buyout firms, and other hot new businesses are attracting top B-school graduates who might otherwise have gone into investment banking. Starting compensation for Morgan Stanley bankers ranges from $75,000 to $100,000 per year, and the average managing director makes $1.5 million to $2.5 million. But these sums may not look so great compared with other high-tech opportunities these days. ''ACTING LIKE COWBOYS.'' Another danger, rivals and even some Morgan Stanley insiders say, is that pressure to put the bank's capital to work will lead it to recommend unnecessary deals to clients. Some rivals say Morgan Stanley is overreaching in its lending. For instance, the bank recently withdrew a high-yield offering for Germany's Kirch Group and wound up extending the company an $820 million loan. Both Morgan Stanley and Kirch Deputy Chairman Dieter Hahn say this episode demonstrates the bank's commitment to a client. Competitors say the bank was overly aggressive. ''They are acting like cowboys,'' says one rival banker. ''They went in and promised the world and didn't deliver.'' Cowboys or not, Morgan Stanley isn't stopping. The firm is just beginning to tap a potentially huge market for public offerings in high-tech--where it is an established leader in the U.S. ''Europe is going to change faster than you think,'' says Chief Administrative Officer Amelia Fawcett. But senior Morgan Stanley bankers realize that as prosperous as their institution seems now, even it could fall prey to the powerful forces of consolidation, especially in a downturn. One top player predicts that the increasing costs of competing could force the European and, indeed, the global industry to meld down to two or three big players. But even if Morgan Stanley is taken over by a larger institution someday, members of its European team will have the satisfaction of knowing they reshaped the old world into a new one. By Stanley Reed in London _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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