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Morgan Stanley: No Stars -- And Lots Of Top Tech IPOs


On the morning of Apr. 5, 1996, Morgan Stanley's (MWD) head of investment banking, Terry Meguid, walked into the firm's Silicon Valley office and was greeted by the sight of empty desks. He had flown in from New York the night before, just hours after Frank Quattrone, the firm's head of tech banking, had called to say he was joining rival Deutsche Morgan Grenfell and was taking about 25 employees with him. It was a huge blow: Since the early 1980s, Quattrone had built Morgan Stanley's tech banking practice from a backwater into a powerhouse.

Over the following months, Meguid doggedly rebuilt the firm's tech practice around a handful of remaining employees and new recruits. And this time he vowed to do things differently: He made sure power wasn't concentrated in one person -- or in one location. The episode "gave us an opportunity to step back and say: 'What's the best way to build this business so we never feel [it] is so dependent on an individual that it's unhealthy?"' he says.

Last year showed how well that strategy can work. While Quattrone was appealing an 18-month prison sentence for obstructing an investigation of Credit Suisse First Boston (CSR), which he joined after leaving Deutsche, Morgan Stanley's tech team had a remarkable 2004. It raised $4.6 billion from initial public offerings of tech stocks worldwide, according to researcher Thomson Financial (TOC). That performance put Morgan Stanley at the top of the rankings for tech IPOs, after finishing fourth in 2002 and 2003. The highlight: managing the $1.7 billion offering of search engine Google Inc. (GOOG).

That an institution and not an individual grabbed the spotlight last year shows how much tech banking has changed. A long bear market and four years of scandal and reform have forced bankers to sober up. Also, tech banking has matured over the past decade from a niche dominated by charismatic salesmen into a global game played by highly orchestrated teams. "The business today isn't about any one person," Meguid says. "It's about the brand and the franchise."

Morgan Stanley wasn't the only brand that did well last year. Goldman Sachs Group Inc. (GS), the 2003 king of tech IPOs, finished second, raising $3.8 billion in high-profile offerings for Freescale Semiconductor Inc. (FSL), Shanda Interactive Entertainment Ltd. (SNDA), and other companies. And both Goldman and CSFB outranked Morgan Stanley in the value of tech mergers and acquisitions they advised worldwide in 2004, says Thomson.

Yet Morgan Stanley stood out for the quality of its tech IPOs. Ultimately, a tech-banking group is judged not by the value of its deals in one year but by repeat business with successful companies over many years. Tech bankers compete most fiercely for the IPOs of companies thought to have the best chances for long-term growth. Such outfits do follow-on offerings and acquisitions, providing their bankers with fees for years.

ANALYSTS STILL MATTER

Last year, Morgan Stanley managed to score an outsize portion of the most hotly contested tech deals. In a June, 2003, article, "IPOs-in-Waiting," BusinessWeek named the four most sought-after tech IPO candidates for 2004: Google, customer-management software maker salesforce.com (CRM), chipmaker Atheros Communications (ATHR), and business-infrastructure software maker VMware. Morgan Stanley led IPOs for Google, salesforce.com, and Atheros, and advised VMware on its $635 million sale to EMC Corp. (EMC).

Morgan Stanley's bankers can't take all of the credit for winning the plum deals. Even in an age of reform on Wall Street, research analysts still matter when companies select banks to take them public. Analysts can no longer accompany bankers calling on clients or prospects. But companies still meet with analysts separately, and those meetings influence their choice of a bank.

In the case of Google, Morgan Stanley's Internet analyst, Mary Meeker, met with the company in between visits from bankers long before its IPO. "Mary Meeker's sponsorship was of significance," says Michael Moritz, a venture capitalist at Sequoia Capital and a board member at Google. "She knows the company well." Meeker also called on 51job.com. "The banking side can't promise anything from the analyst side," says David Chao, a venture capitalist at DCM-Doll Capital Management and a board member at 51job.com. "But it definitely was one factor in our decision even though in this new world, theoretically, it shouldn't matter."

Morgan Stanley has been laying the groundwork for its big year for some time. After Quattrone's departure, Morgan Stanley added tech bankers not only in the U.S. but also in Europe and Asia, and focused on getting them to work as a team. Like its peers, the firm began pruning back its tech practice in 2000 and had laid off about 60% of the staff by 2003. But instead of exiting some foreign markets, as a few rivals did, it maintained a lean version of its worldwide organization. "We saw that the business would continue to become more global," says Dhiren Shah, global head of the technology group at Morgan Stanley.

The decision paid off. In 2004 banks found themselves vying for the IPOs of several Asian companies. "Every bank wanted to participate in a transaction involving 51job.com," says Paul E. Chamberlain, a managing director at Morgan Stanley. The Shanghai-based site is China's biggest jobs listing, and its profitability and growth are exploding. It wound up choosing Morgan Stanley to lead its $73.5 million offering. "We wanted a firm that was strong on both sides of the Pacific," says Chao.

Morgan Stanley also made important moves at home during the downturn. From 2001 to 2003, its bankers called on clients, startups, and venture capitalists even while the IPO and M&A markets were dormant. "Of all the groups, Morgan Stanley has worked the hardest to stay engaged in the venture community," says Charles Beeler, a venture capitalist at El Dorado Ventures in Menlo Park, Calif. At tech's low point in 2001, Morgan Stanley launched the CTO Summit, an annual conference that introduces startups to the firm's chief technology officer and info-tech staff.

LONG-TERM RELATIONSHIPS

By staying close to clients, the firm was first in line to provide advice when software companies began a series of mergers in 2003. "We did the first wave of software consolidation," says Chuck Cory, Morgan's head of tech M&A. That year, the firm advised software maker J.D. Edwards on its $1.7 billion sale to PeopleSoft (PSFT), which inspired a hostile bid for PeopleSoft by Oracle (ORCL). "J.D. Edwards had a long history with Morgan Stanley," says Robert Dutkowsky, the former CEO of J.D. Edwards. "It was a relationship of trust."

Long-standing relationships were vital to winning IPOs, too. Despite the loss of personnel during the downturn, Morgan Stanley's tech group prides itself on the continuity of its remaining members. Several people -- including Shah, Chamberlain, Cory, technology capital markets head Colin Stewart, and Managing Director Michael D. Grimes -- have been with the firm for 10 years or longer. "That's really important to clients -- not moving around, not moving to the next European bank that's trying to overcompensate someone," Grimes says.

HOT RIVALRY

The continuity at Morgan Stanley helped it win the Google deal. Grimes's relationship with the company began in 1999 and lasted through the rise, fall, and recovery of investors' appetite for Internet stocks. "This was not a piece of business that was won in the last 90 days," says Google board member Moritz. In the case of salesforce.com, lack of continuity may have cost one of Morgan Stanley's competitors the IPO business. "We would have loved to have used Goldman Sachs, but Paul Phillips, the tech-banking head, left just as we were starting our selection process," says Marc Benioff, CEO of salesforce.com.

Goldman Sachs could have the last laugh if it regains the top spot in tech IPOs this year. Morgan Stanley "can be beaten, there's no question," says Tor Braham, co-head of tech M&A at Deutsche Bank Securities Inc. (DB), which edged out Morgan Stanley last year to lead the IPO of business software maker Unica Corp. Universal banks such as Deutsche Bank (DB), Citigroup (C), and UBS (UBS), which also offer commercial banking, have made headway in tech IPOs and M&A in the past five years. That has put added pressure on pure investment banks such as Morgan Stanley and Goldman Sachs.

If 2005 turns out to be anything like 2004, Morgan Stanley will give its longtime rival fits. Already, the firm plans to lead a public offering that's likely to be one of the year's hottest -- digital audio developer Dolby Laboratories Inc.'s (Goldman Sachs will co-manage the deal). Not bad for a tech investment banking team without a star.

By Justin Hibbard in San Mateo, Calif.


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