Morgan Stanley just beat JPMorgan Chase and Goldman Sachs for a second straight year in one of Wall Street’s most competitive businesses — and it’s poised to win again in 2019. Its secret: Quirky dealmakers wielding a spigot of private money.
The bank is the world’s top stock underwriter, a title that in recent years has shifted between JPMorgan, Goldman and Bank of America until Morgan Stanley narrowly claimed it in 2017, according to data compiled by Bloomberg. In coming weeks, Morgan Stanley is set to handle one of this year’s marquee deals, the initial public offering for Uber, making it even harder for competitors to catch up.
While the firm’s success in 2018 was fueled in part by stock sales for companies abroad, including in Asia, the rainmaker to watch this year is Michael Grimes, who co-leads the U.S. technology franchise. He and colleagues have been tending relationships with a slew of big tech firms heading to market, such as Palantir, by helping the ventures tap into the bank’s wealthy clientele and sovereign wealth funds for funding, giving their businesses more time to mature before going public.
“As many of the unicorns are staying private longer, they’ve got more rounds of private financing,” says Jay Ritter, a professor at University of Florida’s Warrington College of Business. That gives an advantage to Morgan Stanley, which has arranged much of that funding, he says.
Grimes is a colorful personality on Wall Street. A computer science and electrical engineering major, he has a renowned penchant for the gadgets and apps produced by the tech firms he’s in charge of wooing.
On the road, he relies on Airbnb to book accommodations and rent out his house, according to people familiar with his technique. Before leading Zynga’s IPO in 2011, he mastered its “CityVille” game on his phone. While pitching Ancestry.com, he showed the company an elaborate family tree he and his mother created together. For Uber, he moonlighted as a driver.
The strategy doesn’t always lead to landing the deal. Grimes became an avid reviewer on Yelp before its IPO in 2012, a person familiar with the situation said. Yet Goldman Sachs ultimately won the mandate.
One person who’s worked closely with his team, discussing strategy on condition of anonymity, described such engagement as the group’s secret sauce: Grimes and other bankers obsess over how startups and their services operate, then use that knowledge to impress the venture’s executives.
“He works hard to ensure he can see and understand the world through the lens of his customers,” says Mary Meeker, the famed venture capitalist, who previously worked as an analyst at Morgan Stanley and has known Grimes for more than two decades.
All bankers aspire to do that — though not always by going to such lengths. Yet Grimes and his colleagues, many of whom have worked as bankers for 20 to 30 years, have another asset that’s even harder to mimic: The firm helps raise money for young companies in private markets, often tapping high-net-worth clients in its $2.5 trillion wealth management unit. Goldman’s comparable franchise is a fraction of that size.
Other rainmakers at Morgan Stanley include Paul Kwan, who runs West Coast technology banking and helped lead private financing for Uber and Airbnb, which has said it aims to go public by late 2020. He also led financing for Domo, a company that warned investors that without an IPO or new sources of funding, it would have to slash costs. The shares have slipped 6.5% since their debut in June.
David Chen, the global head of software banking, was the lead placement agent for ForeScout and DocuSign, the electronic signature company whose shares have climbed 38% since its April public offering. He’s also served on a team that’s become the adviser-of-choice for Palantir, Peter Thiel’s secretive data-mining and visualization venture. The bank has earned about $60 million in fees arranging private funding for the 14-year-old company — about equal to what it could earn handling an IPO.
Many startups need dealmakers who can set attractive valuations for both IPOs and takeovers, says Betsy Atkins, a technology entrepreneur who’s served on boards at companies including Polycom, which hired Morgan Stanley for stock offerings, takeovers and eventually its own sale. The bank was among the top three advisers on takeovers involving tech companies last year, according to data compiled by Bloomberg. Its IPO and M&A teams are particularly collaborative, she said.
“They consider every option for your company and run simultaneous IPO and M&A processes to get you the best price,” she says.
Morgan Stanley was among advisers on the year’s biggest tech deal, guiding Red Hat on its sale to International Business Machines for $33 billion in cash — a 63% premium to the target firm’s closing price.
Debt expertise helps too. Morgan Stanley steered Uber through its first high-yield bond sale and helped WeWork borrow more than $700 million through an offering led by JPMorgan.
Morgan Stanley generated $1.4 billion in equity underwriting revenue in the first nine months of 2018, compared with $1.3 billion at Goldman. That figure also includes follow-on offerings and fees associated with deals in which Morgan Stanley was not the lead underwriter.
Morgan Stanley also ranked No. 1 as lead underwriter by volume of global technology IPOs, according to Bloomberg data.
To be sure, in North America, where regulatory filings usually designate a “left lead” bookrunner, Goldman Sachs’s name most frequently filled that space in 2018, a sign that it’s at the head of those underwriting syndicates and may pocket richer fees. Both Goldman and JPMorgan have major deals lined up for 2019, too. Slack hired Goldman Sachs to be its lead underwriter for an IPO that could set a valuation surpassing $10 billion, and Lyft has asked JPMorgan to run its debut. Both appointments followed long courtships.
“A little bit of the choice is who does a good job at schmoozing,” Ritter says. But what also matters is “who has established relationships beforehand.”
