Morgan Stanley's Franck Petitgas on the investment bank's turnaround

Morgan Stanley earned $617m during the final three months of 2009, giving the bank its second straight profitable quarter after a year of losses and a likely full-year net profit of $1.1bn, up from a loss of $807m the year before. Morgan bankers hope that this will bring an end to a dreadful couple of years, during which the investment bank had to seek refuge as a bank holding company to secure its funding, then sell a 20% stake to Mitsubishi UFG to guarantee survival.

The turnaround also means that James Gorman, who took over as chief executive officer from John Mack in January, can begin the year with a relatively clean sheet.

If 2008 was focused on survival, 2009 was spent deleveraging and derisking the balance sheet, rehiring in key areas and, latterly, putting in place a new senior management team. Mr Gorman lost no time in appointing Colm Kelleher, previously chief financial officer, and Paul Taubman, previously head of global mergers and acquisitions (M&A), as co-heads of the bank's institutional securities group, which comprises trading, underwriting and advisory.

"As James Gorman pointed out in his recent presentation of our strategy to the analyst community, this year is all about delivering on that transition," says Franck Petitgas, global co-head of investment banking. "Even taking into account a better Q3 and Q4, the firm faced significant earnings headwinds last year due to legacy issues. But we begin 2010 in a very different place. We have the right strategy, and the senior leadership is strong and aligned; there are no loose ends in terms of how we are organised. This year it is all about the execution."

Lost revenue

Mr Gorman and the bank still have something to prove. Despite welcoming the return to profitability (and taking into account a US accounting quirk that meant the bank had to take a $5.5bn charge because of the rise in value of Morgan Stanley's bonds) investors criticised the bank for not profiting enough from the stock market rally and vibrant fixed-income activity in 2009, where trading revenues have seriously lagged behind those of its rivals. Fixed income sales and trading revenues fell to $686m, a $1.4bn decline from the third quarter, considerably less than major competitors such as JPMorgan, which chalked up revenues of $2.75bn in the same sector.

While the bank has rejected the notion that it had been overly conservative, Mr Kelleher, who will oversee sales and trading, is in the process of hiring hundreds of sales and trading staff in a bid to play catch-up.

Mr Petitgas' business sector has no such issues. Revenues from Morgan's advisory and underwriting businesses increased by 42% from the previous quarter. It ended 2009 at the top of the global and Europe, Middle East and Africa (EMEA) league tables for M&A, according to Merger Market (although it ranks only eighth in terms of revenues, according to Dealogic). For the year to date, financial site Bloomberg ranks it first for equity and equity-linked issuance; it is also currently number one in terms of global restructuring advisory, according to Dealogic, and news service Debtwire ranks it number one for European debt restructuring advisory.

"Nobody is a winner in this crisis, but we have come out of it as a stronger firm; we had some great results in 2009," says Mr Petitgas. "Despite the tough times the firm has been through, the client franchise has not only survived but improved. We have gained market share across M&A, financing and capital markets. We have been involved in every significant transaction. That is the best measure of a client franchise."

Mr Petitgas also rejects the notion that the bank is overly conservative, pointing to a bought block trade that it carried out for broadcaster BSkyB on February 8. The bank was sole manager for the disposal of BSkyB's 10.4% strategic stake in UK television network ITV through an accelerated bookbuilt offering. "For an important client, we took the risk of buying the ITV stake and then selling it on to new investors. It's about intelligent risk taking," he says.

Mr Petitgas, whose remit includes all of Morgan Stanley's underwriting and advisory business outside the US, says the firm's league table success provides evidence that it has been able to maintain client relationships throughout the financial crisis and the bank's own troubles. He cites, for example, Morgan's successful defence of long-standing client Rio Tinto against arch rival and predator BHP Billiton. The resulting merger of Rio Tinto's iron ore facilities with BHP Billiton, agreed in September last year, helped to propel Morgan Stanley to the top of the M&A league tables.

Another key deal for the bank, he says, was HeidelbergCement's restructuring. Morgan Stanley acted as exclusive financial restructuring advisor, resulting in the refinancing of its €8.7bn outstanding syndicated and bilateral loan facilities in June 2009. In September, this was followed by a €4.4bn equity offering, on which Morgan Stanley acted as lead bookrunner. A concurrent rights issue and equity secondary offering was an unparalleled structure in Germany, and the €2.3bn at-markets rights issue and €2.1bn equity secondary offering represented the largest equity transaction in Germany since 2003, the largest combined rights issue/secondary placement in Europe in 2009, and the first re-initial public offering (IPO) in Europe for more than 18 months.

It looks as if the hiring spree in debt capital markets could be paying off, as Morgan has added almost 8% market share and leads the tables for yankee issuance for European corporate clients, as well as topping tables in the critical sovereigns supras and agency business, where more activity is expected this year.

European success

Mr Petitgas admits that the competitive landscape in EMEA is as "intense and diverse" as ever, but says the bank will be able to maintain its current momentum. He says he is not worried by revved-up competition from the likes of Barclays Capital, which has been voraciously poaching staff. Last year the UK bank poached Mark Warham, Morgan Stanley's former chairman of the UK business, as well as Jon Bathard-Smith, who looked after some of Morgan Stanley's top UK broking clients such as ScottishPower and National Express. "We have always lived with this kind of competitive landscape," says Mr Petitgas.

More importantly, he says, Morgan Stanley is part of a small, elite group of firms with a truly global footprint who have the "secret sauce"; a subtle mix of footprint, culture, experience, partnership spirit and relationships. A good litmus test for the ability to be able to deliver that mix on a global scale is success in Europe, he says, which is inherently about cross-border business. "Our scorecard in Europe speaks for itself," he adds.

Morgan Stanley has been at the centre of bank recapitalisations over the past 18 months or so, working on deals including the rights issues for Royal Bank of Scotland, Société Générale, DnB NOR and SEB in Europe, as well as AIG, Freddie Mac and Fannie Mae in the US.

Going forward, Mr Petitgas believes that Morgan Stanley is increasingly "connecting the dots" in its global business, citing Morgan's record in China, where the bank was advisor on six of the country's last eight bank deals. The firm was also ranked first in 2009 for Asian FIG M&A - ahead of Deutsche Bank, JPMorgan and UBS - according to Thomson Reuters, and first for Asian FIG equity - ahead of UBS and Goldman Sachs - according to Dealogic. "We are delivering the firm and taking market share in many of the key growth sectors," he says.

Most market participants had predicted that this was going to be a good year for IPOs, many coming as a result of private equity exits. But speaking as Greece's fiscal crisis unfolded, with the euro and eurozone sovereign debt markets under pressure and as several IPOs were shelved, it looks as if that declaration may come undone. Mr Petitgas, who began his career with Morgan Stanley in the equity capital markets business, says he is still positive about the IPO market.

"Two weeks do not set the tone for the year," he says. "The IPO sector is the most sensitive barometer of the capital markets because it involves new companies. It is worth noting that the IPOs were pulled in a week when convertibles and block trades were executed successfully. [The IPOs] were dropped because of valuation issues, not because of a lack of buyer interest."

As evidence, Mr Petitgas notes the successful launch of a £497m ($769m) five-year convertible bond for UK software company Autonomy in February, on which Morgan Stanley was global co-ordinator and sole bookrunner. The transaction was announced with a 3% to 3.50% coupon range and a 30% to 40% conversion premium range, and was quickly oversubscribed at the wide end of the range at the same time as the Greek crisis rumbled on.

Mr Petitgas believes the markets are still underpinned by some solid fundamentals. "Economic recovery has taken hold, even if at different speeds around the world, and there is a lot of liquidity waiting in the wings. Strategic buyers are more confident, see value in consolidation and have access to capital. Sovereign wealth funds are also showing signs of renewed activity and interest globally. Investors will be selective and valuations may need to be revised, but there is a very large pipeline that I think will get done, not necessarily in the public markets."

Career history

Franck Petitgas

2008 - Appointed global co-head of investment banking at Morgan Stanley. Appointed head of international investment banking. Joins firm's global management committee.

2006 - Promoted head of European investment banking.

2002 - Promoted head of European equity capital markets and debt capital markets.

1997 - Promoted head of European equity capital markets.

1996 - Appointed managing director.

1995 - Moves to Morgan Stanley in London as an executive director in equity capital markets from New York.

1993 - Joins Morgan Stanley in New York in equity capital markets.

1986 - Joins SG Warburg in London as an associate in investment banking.

1983 - Graduates from École Supérieure de Commerce de Paris.

Franck Petitgas is also the chairman of the Tate Foundation and a member of the board of trustees of Tate.