When Morgan Stanley hired Alasdair Morrison, doubts arose about his calibre as an investment banker. Yet he contends that his managerial skills as well as his CEO's mindset is what makes him relevant in his new post. In the second half of our exclusive interview, Morrison and Mario Francescotti discuss investment banking in Asia, China and CICC, confusion over PCCW and cross-shareholdings.
Lord: What are your plans for the core investment banking business over the next 12-18 months?
Morrison: I think one of the key strategies is to build on the existing core businesses. Morgan Stanley already has a very strong core platform both geographically and functionally. The main thrust will be to make sure that those core businesses continue to develop. We talked about the need for restructuring around Asia so the M&A part of the business will be very important, because companies will have to respond to this challenge of globalization by getting larger.
Lord: Do you have any predictions for how large the M&A market will get in Asia? It is currently around $100 billion to $150 billion. How big will it get?
Francescotti: Instead of trying to predict how big the market will be, all I will say is that the market needs to grow if we are to produce the Asian winners. If it doesn't grow then the investment banking business in this part of the world will be totally dependent on the cyclicality of the equity markets. I personally think the market will double in a relatively short period of time, less than two years, say.
Despite the fact that the equity markets have turned down this year, companies are restructuring, the M&A volumes have gone up, the deal sizes have gone up, the secondary volumes have gone up, shareholder value is an increasing theme, so all these trends are happening out there. There are a whole load of externalities that are making the markets weak - oil prices, the technology bubble, the Fed rising rates and so on - but with the depressed markets you can see some companies holding their own. The weakness of the equity markets could make you think that restructuring isn't happening. But when you peel off the layers, you see that it is continuing. This means it is a good backdrop for our business plan and the business plans of a few of our peers.
Morrison: One of the most interesting examples of what Mario is talking about is in Singapore. There you do see a number of the major corporations that have really taken on board the fact that they need to restructure. They are determined to be the winners in Asia. It is impressive to see it happening.
Francescotti: The interesting thing about Singapore is that these companies are restructuring before there are any symptoms or problems. Most of the rest of Asia is restructuring in response to problems.
Morrison: Yes, Singapore is driving its own agenda.
Francescotti: Singapore continues to impress us because they are trying to be ahead of the curve.
Lord: These are companies such as?
Francescotti: Singapore Technologies, Temasek, DBS, PSA. The way that the Temasek Group and Singapore Technologies look at their companies is very sophisticated.
Lord: It must be brutally competitive serving these clients. There are an ever-shrinking number of financial service providers all going after the same clients. How do you win the mandates these days?
Francescotti: There are two aspects to this. Three years ago there were 20 firms competing for business. Now there are eight. Over time that number will shrink further. The competition is more intense among the eight, but there are less firms that can deliver the services that the client needs. No firm should expect to be able to do all the business. What you want to do is build good long-term relationships with your clients. That is the most critical issue. There are a number of clients that are restructuring and we all want to identify ourselves with them and work with them to create the winners. The whole issue with us is depth of relationship with the client.
Morrison: Yes. And to do that effectively you have to build up industry strengths and have industry focus. That's why Morgan Stanley has taken great pains to build up in telecoms, financial institutions, energy, utilities and so on. We now have terrific industry strengths on a global basis that can be brought to bear on these chosen long-term relationships in Asia.
Francescotti: Before the crisis, the main industries that we serviced were property, energy and utilities. Since the crisis, financial institutions and the technology and telecom companies have become much more dominant. Because of privatization, the telecoms sector has become very important for us. The need for consolidation in the banking market means that sector is very important for us. And technology companies are in the new economy space and so they too are very important.
Lord: Now that you are focusing so heavily on specific industries do you think Asian companies will do so too? In that regard are we seeing the de-conglomeration of Asian companies? Alasdair, perhaps your experience running one of the largest Asian conglomerates gave you some insights on this?
Morrison: I think it depends on the businesses. In Singapore the government is asking the banks to dispose of their property assets. So there is a drive to focus there. In other areas I think the conglomerate structure still has some validity. It will vary according to particular businesses and the synergies they can achieve between themselves.
Lord: Are there any mandates out there coming up in the next few years that you are particularly keen to work on?
Francescotti: We think there will be continued corporatization and privatization in this region. Australia has already gone a long way down that path. In Korea, Taiwan, China, Hong Kong, Singapore and India there will be more privatizations. In terms of particular mandates, we prefer to establish key relationships with the key clients, rather than focus on specific deals.
Lord: You mentioned China. China has obviously been a fantastic source of deals for investment bankers this year. As Minister Wu Jichuan said at the time of the first China Telecom deal, "this is just the first course of a major banquet." How fat is Morgan Stanley going to get at this banquet?
Morrison: We will do our bit to help China restructure. It is a very exciting opportunity for Morgan Stanley and we are extremely well positioned due to our joint venture in CICC and the deals that we have done there. Everything the government is doing is moving the country in the right direction. This will provide great opportunities for us and for Mainland China and, as a spin off, Hong Kong, which is the service center for China.
Francescotti: China is clearly on the path of reform and restructuring. There is no doubt that the entire civil service is focused on this reform process. We think there is a large-scale programme of corporatization still set to happen there. One of the interesting things about the IPOs of Sinopec and PetroChina is that these two deals happened in the old economy. The important thing for China is to try to bring more of these large old economy sectors - steel, railways and power - to market. The list of potential industries and companies actually is endless. And what they have to do is try to find a model for corporatization and restructuring that works for investors.
Morrison: Its more than just privatizations. It is the restructuring of entire industries. The airline industry is a good example.
Francescotti: There are going to be a lot of opportunities there. And the expertise that global firms can bring to China in those sectors will let the Chinese companies come into the public domain. It is also the case that we are extremely proud of what we have achieved with CICC. CICC may well be the top underwriter of equities in Asia this year, beating Morgan Stanley, Goldman Sachs and Merrill Lynch. That is pretty impressive for a company that is only five years old. I don't think CICC could achieve its position if it was a wholly owned foreign company. It is an increasingly independent Chinese investment bank with international best practices. We are proud of our partnership with China Construction Bank in CICC. And you must not underestimate how important China Construction Bank has been to CICC's success. There are a number of key issues where China Construction Bank has been very helpful to CICC.
Lord: Is CICC's success emblematic of the growing sophistication of China's capital markets?
Francescotti: We hope CICC will play a growing part in the development of China's domestic capital markets - the asset management business, the secondary sales and trading business, the private equity business. There are a number of areas that we think it will be a long time before foreigners can get fully into the market. But CICC, because of its unique position, can help develop if it is granted the full approval of the authorities.
Lord: What are your plans for the ownership of CICC. Will there be any kind of sell down?
Francescotti: It may well be that the company becomes a public company and inevitably then everyone will have to take some kind of dilution. But our desire certainly is not that there will be any kind of sell-down. We want to maintain our interest in CICC as much as possible.
Lord: There has been some controversy recently over your involvement in PCCW's take over of Cable & Wireless HKT. The latest rumour is that you have resigned your mandate from Telstra in order to get league table accreditation for PCCW advice. Can you clear this issue up for us?
Francescotti: We are still engaged working for Telstra. The fact that we were able to get accreditation from PCCW shows what a good relationship we have with PCCW. But we are working with Telstra and working with their best interests at heart.
Lord: Alasdair, now that you are an investment banker, what advice would you give Jardines?
Morrison: My time at Jardines is in the past. We will certainly continue to call on Jardines with acquisition ideas and so forth, but I'm not in a position to talk about Jardine's structural issues.
Lord: There are rumours that you are going to split the shareholding of Morgan Stanley Asia in two, do a cross shareholding and re-list in Bermuda. Is this true?
Morrison (laughing): I think you can safely assume that is not even remotely in prospect.
For part 1, click here
