Dmg's Brash Big Game Hunt
When Netscape Communications Corp. wanted to sell more stock last November, the fighting to handle the underwriting was fierce. Morgan Stanley & Co. wanted to hang on to the high-profile client it had taken public in 1995, while Germany's Deutsche Morgan Grenfell (DMG) needed the deal to pump up its fledgling push into technology banking.
DMG came up with a highly unusual and aggressive bid. As an alternative to selling Netscape's stock directly to its customers, DMG offered to buy the entire Netscape stock issue itself and then sell it to investors later. That would have meant more risk for DMG, a unit of Germany's huge Deutsche Bank, but less uncertainty for Netscape if the deal ran into a tough market. "I like the fact that we have a partner with deep pockets and long arms," says Frank Quattrone, chief executive of DMG's Technology Group. "Those who don't will lose market share."
Netscape, which declines comment, stuck with Morgan Stanley as lead underwriter, though it did enlist DMG as a co-manager. Says D. Rex Golding, new managing director of Morgan's technology group: "Frank and his team discovered that these ties are difficult to break."
"OUT THE WINDOW." The stakes are high in technology banking these days. But the intense rivalry between Morgan Stanley and DMG has raised the ante. Says Chuck Bay, chief financial officer for Pure Atria Software in Sunnyvale, Calif.: "It has shaken everything up. Everybody knew the hierarchy before. Now, that's out the window."
The skirmishing began in April, 1996, when Quattrone, Bill Brady, and George Boutros defected from Morgan Stanley to Deutsche Morgan Grenfell. Guaranteed fat pay packages lured all but one member of Morgan Stanley's Menlo Park-based mergers-and-acquisitions crew and five other professionals to DMG.
Touting its team's decades of experience garnered at Morgan Stanley, DMG has grabbed some marquee assignments. It advised Ascend Communications Inc. in its announced $3 billion bid on Mar. 31 for Cascade Communications Corp., which was counseled by Morgan Stanley. And DMG was just selected to lead manage the upcoming initial public offering of Amazon.com Inc., the Seattle-based online bookseller.
But Morgan Stanley is hardly down and out. The firm ponied up big bucks to keep its top-ranked analysts, rebuild its Silicon Valley staff, and retain most of its premier technology clients, including Oracle, Applied Materials, and Hewlett-Packard. It remains the clear market leader in technology equity underwritings and M&A (table, page 88), while DMG is 17th, well behind many others, according to Securities Data Co. "I don't think anybody has really challenged Morgan and Goldman [Sachs & Co.] in technology," says Christopher Lord, an analyst at Amerindo Investment Advisors. Says Morgan Stanley investment banking chief Joseph R. Perella: "DMG is not the firm we spend a lot of time focusing on. We think a lot more about Goldman, Merrill [Lynch], and Lehman [Brothers]."
"CARE AND FEEDING." Still, part of the reason for Morgan's continued dominance in technology, say Silicon Valley observers, is that it takes new rivals seriously. "They've never been better with the care and feeding of customers," says venture capitalist C. Richard Kramlich. Perella made three West Coast visits to see clients and helped land new business from companies such as Pointcast Inc., the hot Internet startup.
Last December, when DMG scheduled a conference in Phoenix a month before one was planned by Morgan Stanley in the same city, Morgan prepared a memo for investors comparing the two events. It noted that Morgan's conference was more industry specific and allowed investors more time with company executives, a claim DMG disputes. "They will throw any mud they can at us to slow us down," says DMG's Brady.
DMG, in fact, behaves as if it, and not Morgan Stanley, is on top. The technology group views itself more like upstart Netscape than as a staid investment bank. Such self-assurance has helped snare some deals from former Morgan clients, including Apple Computer, National Semiconductor, and Intuit, as well as Goldman customers Baan and PeopleSoft. After losing $10 million to $20 million in 1996, Quattrone says DMG may book more than $100 million in revenues this year. "That's significantly better than we expected for 1997," says W. Carter McClelland, CEO of Deutsche Bank North America. "The Europeans can't believe that this group is this successful this quickly."
DISTRIBUTION CONCERNS. DMG has had less success persuading companies to let it lead manage IPOs and equity deals. DMG's technology group has completed only two lead-managed IPOs--in part because some executives question the bank's sales and trading capability. Even some DMG boosters express concern. "Their distribution isn't where I'd like it to be," says Christos M. Cotsakos, chief executive of E*Trade Group Inc., whose IPO was co-managed by DMG. "They haven't traded our stock as much as we would have liked."
DMG says such worries are nonsense. Take the Amazon deal, for which virtually every major investment bank competed. Sources say Morgan Stanley had to bow out because of conflicts of interest with existing client Barnes & Noble Inc. Amazon was then drawn to DMG by its experience, research, and creativity, sources say. DMG even presented its pitch to Amazon in the form of a hardback book, with www.amazon.com printed on the book's spine. Amazon declines comment.
Meanwhile, the combatants continue to wrangle. "This is not a firefight," says Golding. "It's a war of attrition." Perhaps that's why DMG recently leased larger office space just down the road from Morgan Stanley.