Morgan Stanley M&A head focuses on activism and Japan

Tom Miles

Of the big Wall Street banks, Morgan Stanley is something of an odd one out. It does not have a consumer bank and though it is a top investment bank, it has a smaller balance sheet than US-based universal banks. Also, it has not undergone a major restructuring since the financial crisis 10 years ago, unlike many of its rivals on both sides of the Atlantic. “Morgan Stanley has been able to stick to its knitting, which has been a big driver of our success,” says Tom Miles, head of Americas mergers and acquisitions (M&A).

Nevertheless, Morgan Stanley did not emerge unscathed from the credit crunch. In late 2008, Japanese mega-bank Mitsubishi UFJ Financial Group (MUFG) injected a much-needed $9bn in exchange for a 21% stake in the US lender. At the time, Morgan Stanley’s market cap had shrunk to $11bn, a far cry from today’s $76bn. Through its alliance with MUFG, Morgan Stanley was provided with access to a deep well of capital, giving it the required firepower to compete at the highest levels of investment banking.

Though Morgan Stanley is a regular in the top five global league tables for M&A and equity capital markets (ECM) volumes, rankings such as these are not the focus, according to Mr Miles. The bank positions itself as a problem solver, with more emphasis on being selected as an adviser on big and complex situations than on number of transactions.

Navigating choppy waters

Market volatility picked up for both equities and bonds in the second half of 2018, hitting revenues for investment banks globally. Morgan Stanley had flat results for its big equity trading business and took a big hit on fixed-income trading in the last quarter of 2018. Lacklustre trading had a knock-on effect on its big wealth management business, adding to the pain. However, Morgan Stanley had had a very good run in the first nine months of that year, mitigating the overall results for 2018.

Times of market volatility are exactly when the bank can thrive by offering solutions to clients. “We want to be in the boardroom talking strategy; everything else comes from that,” says Mr Miles. “A large number of corporates are looking at the most value-creating ways to allocate capital, be that through capital expenditures, M&A or share buybacks.” In an increasingly globalised world and complex M&A environment, these deals are not “cookie-cutter”. They require regional, sector and industry expertise all rolled into one.

This is why Morgan Stanley works in client teams, comprising bankers covering the relevant geographies, products and sectors to offer comprehensive solutions. The approach does away with siloes and promotes global connectivity, which has been particularly effective for cross-border acquisitions.

Regulatory reviews for large acquisitions involving multiple geographies are taking more and more time. “CEOs and boards have taken note of the increased regulatory risk and longer closing timelines, especially on large global transactions, and that may well contribute to a slowdown in mega-deals in 2019 after several strong years,” says Mr Miles. 

The year has started very slowly in terms of number of deals announced. The US government shutdown and the noise around the US-China trade war as well as Brexit has caused the market to pause.

Nevertheless, the underlying fundamentals are still good and while global growth may be slowing, it appears to be a long way from recession. “Organic growth is tough to come by in many industries; for the most part companies have already rationalised portfolios and cut costs significantly. They will need to engage in M&A to drive earnings growth,” says Mr Miles, who works closely with Rob Kindler, global head of M&A and vice-chairman of the bank.

Active on activism

Morgan Stanley invested early in a separate activism team to help clients deal with unwanted advances. The team is led by David Rosewater, global head of the bank’s shareholder activism and corporate defence group, who has a legal background. Morgan Stanley now has leading market share in the US.

Companies in the US are familiar with activism, which is more mature in the country than elsewhere. “Activism-focused funds have grown dramatically but in the US there is not much low-hanging fruit left, as companies have become more aggressive and proactive in managing portfolios and capital structures. This has driven activist funds to look overseas for opportunities,” says Mr Miles.

Europe is the logical next port of call for activists looking for opportunities, where these funds have accelerated campaigns and investments. The approaches in Europe tend to be softer and more collaborative, with most discussions behind closed doors, rather than the aggressive public campaigns more common in the US.

Japan in focus

A big trend in global M&A of late has been outbound interest from Japanese buyers. Over the past 10 years there has been an acceleration in Japanese corporations looking beyond the country for good investment opportunities. In 2018, outbound M&A for Japanese companies was nearly $180bn, a record year. While that number is likely to fall in 2019, the trend is likely to continue as well-capitalised Japanese companies look to diversify their earning streams, according to Mr Miles.

Thanks to its joint venture with MUFG, Morgan Stanley has built a sizeable footprint in Japan and is one of the top foreign banks to operate in the country. Japanese corporate culture differs strongly from Western approaches, so having MUFG’s backing has given Morgan Stanley access to local companies that very few foreign banks have, according to Mr Miles. This expertise works both ways, where Morgan Stanley has both advised acquirers as well as targets. The bank was financial adviser to Renesas Electronics Corporation in its $6.7bn takeover of US rival Integrated Device Technology. In pharmaceutical giant Takeda’s £46bn ($61bn) acquisition of Dublin-based Shire, it advised the latter.

“Activism is on the rise in Japan, but requires a different sort of engagement because of the different market dynamics and business culture,” says Mr Miles. Morgan Stanley has long-standing expertise on activism, which initiated in the US, and a strong knowledge of the Japanese market, so it is well positioned to handle activist approaches for clients.

“The situation is tricky,” adds Mr Mills. “There are many conglomerates that could potentially break up, balance sheets tend to be under-leveraged and governance structures differ from the US. But it is hard to bring about immediate change because of a big retail shareholder base and the culture of respect around CEOs.” The typical forthright US-style activism is unlikely to work in this environment. The trend is only just starting to flourish in Japan, but as the shareholder base evolves, more options to expand will crop up.

Looking to the future

One area that is unlikely to run out of steam is technology. “The technology sector is an important driver for both the M&A and the equity markets," says Mr Miles. "Sponsor and trade buyers have been very active in the technology space; we’ve also seen a lot of foreign buyers and non-tech companies enter the fray.”

He has seen this transformation up close. Before taking charge of M&A in the Americas in mid-2018, Mr Miles worked as a banker on M&A in the industrials sector. “Tech is one of the main drivers of global M&A in a way that is very different from even five years ago. Virtually all companies need a tech strategy and M&A is an increasingly important part of that,” he says.

The key to Morgan Stanley’s success is its focus on intellectual capital, according to Mr Miles. “Our greatest resource is our group of experienced bankers. Making sure they have the tools and resources to succeed is critical to our success,” he says, adding that M&A is a cyclical business. The market will go up and down no matter what, so it is important to be well positioned with clients.

The way to get ahead is to provide trust and ensure time is spent wisely, Mr Miles concludes, saying: “At Morgan Stanley we are trying to look around the corner for our clients and offer ideas to get in front of trends.”