Morgan Stanley's take on the IB landscape

We chat with Paul J Taubman, the New York-based head of global investment banking for Morgan Stanley, and the firm's head of investment banking for Asia-Pacific, Matthew Ginsburg.

Five months into the year and Morgan Stanley's global investment banking division has had a good start. The firm is ranked number one in announced M&A deals for 2009 year-to-date with a 43.1% market share, according to data from Thomson Reuters. And last week the bank moved ahead of J.P. Morgan as the top global arranger of equity capital markets deals on the back of a slew of follow-ons in the US. The bank also led the $858 million initial public offering for Mead Johnson, the only US IPO in the first quarter and the first since November 2008. The firm is also among the top three for M&A and ECM in non-Japan Asia. Paul J Taubman, the New York-based head of global investment banking for Morgan Stanley, was in Hong Kong this week. FinanceAsia caught up with him and the firm's head of investment banking for Asia-Pacific, Matthew Ginsburg. 

Paul, you're off to a positive start for 2009. Now, how do you maintain that momentum?
Taubman: A lot of the factors that have gotten us off to the strong start to this year I expect will continue, such as consistency of coverage. I think we have exploited to great effect our global connectivity, our franchise and the dislocations that some of our competitors are dealing with. This market really plays to our strength because what clients are looking for here is strong firms with a global reach and strong, strong bankers. We have all of that. If you look at our M&A business, not only have we been involved in a preponderance of deals -- five of the six largest deals -- but they have been in a variety of industries and a variety of geographies, so there is breadth to the business.

We have been spending a lot of time with financial institutions, particularly in the US, which sought and tapped the public markets post the stress tests and have a desire to repay Tarp [Troubled Asset Relief Programme]. I also think success begets success. It creates more clients who want to talk to us because of the volume of successful transactions that we have executed. So my hope is that we will be able to capitalise on that.

What do the events of October and November of last year mean for Morgan Stanley, and the investment banking division in particular?
Taubman: Well, I think a few things. Going through the events of last fall I think brought all of us closer together. There is nothing that unifies a firm or institution more than fighting for your survival. And that is what we were all doing. 

I think we have emerged in many respects stronger, more cohesive and more committed to each other and to the firm. And I think that is paying significant dividends in 2009. We have a mission. I think people are very, very committed to taking advantage of the opportunities we have.

The other thing that has happened is that many of our competitors are still trying to find their way in this market. And I think we capitalised and are capitalising on that as well. I think those are things that we took as lessons from late last year.

Your firm is a global institution that does have strong platforms and franchises in the US, Europe and Asia. But how do you leverage that?
Taubman: Well part of it is just doing what I'm doing, which is being here in Hong Kong. (Laughter)

Ginsburg: There's significant two-way traffic between our bankers in Europe, the US and Asia. Corporations across the world want to use this dislocation to acquire and gain scale, and they are looking for a global perspective. So for example, our technology bankers go to the US and talk about what is going on in China or India; not a lot of firms can offer this level of global connectivity to their clients. These are differentiated conversations that CEOs want to have and give us the ability to speak with them about their challenges, concerns and aspirations, and the like. 

Surely, your competitors would be saying the same thing?
Taubman: First of all, you have to have global reach and we're not alone in having that. Then you have to have the bankers who are leaders in their particular industries, geographies and products, so that what they say travels around the globe and has real impact. And the third point is you have to have the flows of communication, and I think not all institutions take the information which they have and leverage it throughout the system. 

A lot of that to me is continuity. It takes time to establish that trust around the globe -- that someone in Hong Kong is prepared to fly to New York to go to a client meeting and be comfortable that there is a purpose to it and that the information is used in the best way. I think you only get that if people have been working together for a long time and there is trust in the system, because it requires everyone to be very selfless -- to not only think about their client base and what's happening in their region but also what they can do to help other bankers in the firm around the globe. That takes time, trust and continuity. 

Do you see the Asia arm of investment banking as a growing business, particularly during this global economic downturn?
Taubman: Absolutely. You know when you think about the catalyst for growth -- clearly the equity product in Asia, you look at the extraordinary pipeline that this team has built -- it's here. Sure, the market is dislocated, but it is healing.

This region is the catalyst for growth in the short term, and clearly in the long term. This is where the flows are headed, so this is where we need to make investments for the long term (which we've done). Therefore, we also think we are well positioned to capitalise on the near-term potential. 

What would you consider a good (and realistic) outcome for the investment banking division by the end of 2009 -- if you can quantify in some way, be it earnings figures or league tables? 
Taubman: League tables are just one indicator of success, so I don't obsess about league tables per se. What our financial performance ends up being, is in large part going to be defined by how the markets perform and what underwriting issuance and overall M&A activity there is. 

The way I measure our performance is our share of the available market. At the end of the day the markets will define how much business gets done. And it is our job to define how much of that business belongs to Morgan Stanley. To me, the single best indicator is a healthy increase in our wallet share year-over-year.

Matthew, if you look at the league tables in Asia, you are doing well, particularly in M&A. What's your strategy for Asia M&A?
Ginsburg: This year, there are two themes in particular that are driving M&A. First, there are corporations that are coming out of this dislocation very strong and see this as an opportunity to consolidate their position or expand. Secondly, there are situations which mandate companies to act for defensive purposes. This can be for a multitude of factors; relative scale, the need to cut costs, competitive positioning, to name just a few. Many realise that their present business model needs adjustment, be it to be acquired or, for instance, do a merger of equals. 

We look to help companies from both camps. Our country and industry bankers are constantly in dialogue about what the world's changes mean for them. If you do this methodically and you show both of those sets of corporates that you really understand what is going on for them, you find your way into many transactions. If you ambulance chase -- throw spaghetti against the wall -- in this kind of environment, you will fail.

Are these stronger firms willing to pull the trigger on deals in this environment?
Ginsburg: I think in the fourth quarter and the first quarter there was a view that: 'Yes, this is a situation we would like to take advantage of' but there was also nervousness about catching the falling knife. I think over the past few weeks a lot of people are starting to feel that there is a floor on valuations and a limit to how opportunistic companies want to be. You have to balance waiting for a possible further price fall, with the ability to transact and complete an important deal. Certainly it is reflected in global M&A where transactions are getting done. I think it's also beginning to roll out here in Asia where our dialogue, especially aspirational dialogue, is very, very high and people are authorising us to make approaches and go forward on transactions. There's the ambition to do some very interesting trades.

Do you think there is going to be continued increasing activity on the ECM front out here in Asia?
Ginsburg: I think so. A lot of companies are looking to raise funds and want to take advantage of market windows. While many of these capital raisings are not time sensitive, issuers have been waiting for relative stability and positive market sentiment. The year-to-date market performance has created issuer and investor confidence and this explains both the increase in activity and why I believe this will be a busy year. If you look, we've done more than 10 blocks since April and conversations continue to be extraordinarily active.

For example, India was up around 17% on Monday on news of the elections. There are many clients in India who clearly want to raise capital. I think our $550 million transaction earlier this week for Indiabulls will be the first of many. So we're pushing hard. Yes, it's an interesting world, but we do feel good about where the business is headed. 

What portion of your business would you like to see perform better?
Ginsburg: What portion wouldn't any of us like to see perform better. (Laughter)

Taubman: M&A activity levels have fallen dramatically and I expect that they are going to stay soft for a while. And that drives a lot of our business. Our event lending is a function of it and a lot of our financing is obviously a function of M&A. I think for a variety of reasons we have not fully hit bottom yet in terms of overall M&A activity. 

If we're going to have a very, very healthy market, M&A is going to have to return. I think we're starting to see some signs of life but it takes a long time to fill the pipeline. For me, I'd like that to come sooner rather than later, but I do not think we are going to see a demonstrable pick-up in M&A until early next year. 

Ginsburg: I agree. It's clear volumes in M&A and equities are down globally, and obviously those are key sources of revenue. And Paul's right, if you get an M&A trade with North America, Europe or Asia-Pac there are other elements that go with it, from hedging the currency if it's cross border, to funding, to trying to help someone understand the risks and then taking them out by appropriately structuring the derivatives. So yes, it would be great to have [the M&A] markets come back stronger.

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