Morgan Stanley’s Grimes Masters ‘CityVille’ to Win IPOs From Goldman Sachs
When investment bankers fled Silicon Valley after the dot-com bust in 2000, Morgan Stanley (MS)’s Michael Grimes and his team stayed put on Menlo Park’s Sand Hill Road.
They’re now listed as the first underwriter on all the hottest Web deals, including the initial public offerings of LinkedIn Corp., Pandora Media Inc., Groupon Inc. and Zynga Inc. Morgan Stanley is even in the running for the lead role in Facebook Inc.’s IPO, which looked like it was a shoo-in for its top rival Goldman Sachs Group Inc. (GS) only a few months ago.
Grimes, global co-head of Morgan Stanley’s technology investment banking, meets regularly with investors in search of the next Google Inc. (GOOG) or Amazon.com Inc. (AMZN) and has close ties to venture capitalists at Sequoia Capital, Kleiner Perkins Caufield & Byers and Greylock Partners. He’s also an early consumer of his clients’ products, whether that means widening his circle of contacts on LinkedIn’s network or spending hours building a digital metropolis in Zynga’s “CityVille” game.
“He quickly and astutely connects with companies and teams at that level because of his experience with the product, not just at a transactional level as an investment banker,” said David Sze, a partner at Menlo Park, California-based Greylock and a board member at LinkedIn and Pandora. “Companies sense that. They smell the authenticity.”
Grimes, 44, is leading the Internet field during a year of resurgent IPOs. Companies have held 117 U.S. offerings in 2011, a 29 percent increase from a year earlier and the most for any year at this point since 2007, according to data compiled by Bloomberg.
Goldman Sachs Rivalry
Morgan Stanley got an early jump on Goldman Sachs in January, when LinkedIn chose the bank to lead its offering. The next month music-streaming service Pandora picked the firm as well. Over the next few months, Morgan Stanley was tapped to lead sales by vacation-rental site HomeAway Inc. and Russian search engine Yandex NV.
Of the 10 biggest technology IPOs this year by offer size, Morgan Stanley has top billing on six, double the number for Goldman Sachs, filings show. And that doesn’t include Morgan Stanley’s prime spot for Groupon and Zynga, which haven’t gone public yet.
Groupon listed Morgan Stanley first even after Goldman Sachs Chief Executive Officer Lloyd Blankfein personally visited the startup in Chicago. While Goldman Sachs is co-leading the IPO, Morgan Stanley occupies the coveted upper-left hand corner of the box listing involved banks.
“Upper-left is the prestige spot, and there’s a lot of fighting that goes into who earns that spot,” said Eric Risley, a managing partner at Architect Partners LLC in Menlo Park, who has worked as an investment banker for 22 years. With Zynga’s IPO, Morgan Stanley also is to the left, though Goldman Sachs is co-leading the deal.
Grimes declined to be interviewed for this story. Andrea Rachman, a spokeswoman for New York-based Goldman Sachs, also declined to comment.
Grimes’s penchant for nabbing deals will be put to the test as Morgan Stanley vies with Goldman Sachs for the biggest prize yet: Facebook’s IPO. The Palo Alto, California-based company, with a private-market valuation of $71 billion, has yet to file. It’s poised to dwarf even Google’s 2004 IPO.
Morgan Stanley’s underwriting hasn’t gone without criticism. The doubling of LinkedIn’s shares on their debut raised concern that Morgan Stanley and the IPO’s other banks could have set a higher initial price.
‘Mother of All IPOs’
Goldman Sachs sealed an early advantage with Facebook in January, when it announced a $1.5 billion investment in the social network, buying a $450 million stake at a $50 billion valuation. Goldman Sachs halted plans to offer shares to U.S. investors days later, citing concerns that the deal may violate rules limiting marketing of private securities.
“The mother of all IPOs in the near term is going to be Facebook,” said Michael Kim, a former Morgan Stanley banker who invests in venture funds as managing partner of Cendana Capital in San Francisco. “Morgan Stanley, by having established its track record in 2011 with LinkedIn, Groupon and Pandora, is very well positioned to be the lead underwriter.”
Grimes, a Los Angeles native who graduated from the University of California at Berkeley, joined Morgan Stanley in 1995, when the technology banking team was led by Frank Quattrone. He served as a managing director until 2005 when he and Paul Chamberlain were promoted to be co-heads of the global technology investment banking group.
‘Last Man Standing’
In 16 years at the firm, Grimes has been responsible for financings and merger transactions topping $100 billion in total value, according to his LinkedIn profile. He worked on Google’s IPO in 2004, Ancestry.com Inc. (ACOM)’s offering in 2009 and Hewlett- Packard Co.’s purchase of 3Com Corp. last year.
His most important move may have been one he didn’t make. After the dot-com bust, Goldman Sachs and Credit Suisse Group AG’s investment bank cut back on Silicon Valley office space, and more than 4,000 financial services jobs were lost in the San Francisco Bay area in the ensuing years. Grimes was one of the people who stuck around.
“He could be considered the last man standing from the 1990s and all the action that occurred in the dot-com boom,” said Ken Goldman, chief financial officer at Fortinet Inc. (FTNT), whose IPO was handled by Morgan Stanley in 2009. “Many of his competitors have either moved on or retired, and he still is actively engaged and probably more engaged than ever.”
Morgan Stanley established its technology beachhead in Silicon Valley in 1994. Five years later, Goldman Sachs set up shop across the street.
Chamberlain, who was then head of Morgan Stanley’s office, sent a basket of fruit to the Goldman team, according to an article in the San Jose Mercury News in 2000. The attached note said, “Welcome. I guess this means, ‘There goes the neighborhood.’”
Two years after the stock market reached bottom in 2002, Morgan Stanley landed Google’s IPO. Grimes and his teammate, Paul Kwan, also began pitching their services to Omniture Inc., a Web-analysis company near Salt Lake City. That put Morgan Stanley in position to lead the IPO in 2006 and advise the company on its 2009 sale to Adobe Systems Inc. for $1.8 billion.
“Every banker that comes into your office is a meat- eating, blood-sucking capitalist, so how do you figure out which one you can trust,” said Josh James, co-founder of Omniture. “They were willing to get on a plane and fly to Salt Lake City to meet us when we were a little Podunk company.”
Grimes’s relationship with Zynga CEO Mark Pincus extends to the virtual world, where the two are connected on the company’s two most popular Facebook games, “CityVille” and “Empires & Allies.”
Kim, of Cendana Capital, is connected to both of them on the games, and sees them playing frequently. “CityVille,” which Zynga introduced late last year, lets users build a city by constructing buildings and collecting rent.
“It’s not just that Michael is building out a level or two, he’s pretty advanced in his game playing,” said Kim, who worked with Grimes from 1997 to 2000.
Grimes lives in Hillsborough, an affluent town halfway between the bustling San Francisco startup scene and Menlo Park’s venture capital community. He’s fond of taking clients to the Village Pub, a Michelin-rated restaurant in nearby Woodside, said Fortinet’s Goldman.
Grimes is a longtime fan of the Los Angeles Lakers professional basketball team and a contributor to political campaigns. In 2009, he gave $2,400 to Republican Carly Fiorina’s losing bid for the U.S. Senate in California, according to Campaignmoney.com. Last year, he contributed the same amount to Republican Scott Brown in Massachusetts, who won Edward Kennedy’s old Senate seat.
Outside Fiorina’s Office
His relationship with Fiorina dates to her days at Hewlett- Packard, where she was CEO from 1999 to 2005. Near the beginning of her term, Grimes spent a full day camped outside her office to try and get a meeting for a big acquisition Hewlett-Packard was trying to make, said Kim, without providing details. Grimes eventually got the deal.
“He’s aggressive and patient and really looks to win business the hard way,” Kim said.
Another reason for the firm’s success is the longevity of its team, said Greylock’s Sze, who’s been working with Grimes throughout his decade in venture capital. Chamberlain has been at the firm since 1990, Drew Guevara since 1995, Kwan since 1999 and Colin Stewart since 1988.
The bank has now built ties with the current crop of entrepreneurs, such as Groupon Chairman Eric Lefkofsky. Morgan Stanley previously led the IPOs of Lefkofsky’s earlier startups, Echo Global Logistics Inc. (ECHO) and InnerWorkings Inc. (INWK)
“They put in the work necessary ahead of time to build these relationships and win these deals,” said Harry Weller, a Chevy Chase, Maryland-based partner at New Enterprise Associates, the first venture investor in Groupon. Grimes “gets to know companies really early, much earlier than most people, and before they are actually in need of true investment banking.”
To contact the reporters on this story: Ari Levy in San Francisco at email@example.com; Douglas Macmillan in New York at firstname.lastname@example.org; Serena Saitto in New York at email@example.com