Designing organisational structures to best suit client needs and maximise investment banks’ flexibility is a difficult balancing act, especially if they must also match long-term market opportunities. Geraldine Lambe talks to Michael Uva at Morgan Stanley.
In the capital markets, there is clearly safety in numbers. Investment banks are appointing co-heads in their droves. HSBC, Lehman Brothers, Deutsche Bank Dresdner Kleinwort Wasserstein and Merrill Lynch have all recently instituted co-heads at either global, regional or product level. Michael Uva, sole head of investment banking for Europe, who has been a co-head in the past, says he understands the incentive for creating such dual structures and believes it is one reflection of the organisational issues that investment banks have been struggling with since the bursting of the equity bubble.
Banks reinvent themselves
Just as banks have spent the past three years helping corporates restructure their balance sheets, so have they spent the time re-engineering their own operations. “Since the late 1990s, investment banks have been grappling with how to deliver their organisations to clients in a way that breaks down silos and eliminates warring factions, and which helps clients cope with the complexity brought about by the product proliferation we have experienced over the past 10-20 years. This is one response that can help to integrate a business and bring different skill-sets to bear,” says Mr Uva.
Despite the fact that the bubble burst more than three years ago, perfecting organisational structures remains a high priority, particularly in full-service firms, he says. “It is a very competitive environment. Probably as competitive as it has ever been. If you don’t deliver the firm’s services seamlessly, then the full-service model becomes cumbersome. Some of our competitors are struggling with that.”
Morgan Stanley has created mechanisms for integration: it combined debt and equity capital markets to form Global Capital Markets about two years ago, and has also integrated industry and geographical coverage with execution capabilities. “We wanted to embed specialists – such as a telecoms M&A guy – in the client-facing teams, as you are closest to the client when you are actually doing the deal,” says Mr Uva.
Giving clients the consistent relationships and the coverage they want while preventing a return to the rigidities of the past is a difficult balancing act, so the firm maintains pools of “generalists” who go wherever the deal flow is. The M&A pool is around 50 bankers, much smaller than it would have been historically.
Adequate resources
Are such structures efficient? Mr Uva acknowledges that if badly managed, they can be more expensive, but he stresses that they need not be. “There has to be some organisational ‘tension’. You need to resource the client-facing teams so that they are largely self-sufficient, but not so much so that it creates rigidities; they have to rely to some degree on the generalists’ expertise. It is only when you create fully autonomous groups that you risk duplicating skills and people. Internal discussions focus on finding the balance that creates the most effective and efficient matrix.”
In the new world, banks must not commit the sins of the past: hiring in line with a boom-and-bust cycle. Mr Uva says Morgan Stanley takes a “very thoughtful and long-term view” of markets and resourcing. He adds that for a firm that normally sits around the top of the league tables managerial efforts are focused on “fixing or finessing”. For example, a few years ago the firm wanted to improve its performance in convertibles. That weakness was addressed and, according to Dealogic’s figures for the year to date, Morgan Stanley is now number one in global convertibles.
‘Virtual teams’
The bank is also creating “virtual teams” to make the most of opportunities as they present themselves. For example, he says there is a huge amount of business to be done in European infrastructure projects, which demand competency across multiple disciplines and for which this approach is ideally suited.
“These are the ultimate in long-tail projects. Deals can be two to three years in the pipeline. Governments get involved and the situations can be highly politicised. Virtual teams enable us to draw from the relevant expertise that resides across our entire securities division and we get them round the table on a regular basis to discuss how best to differentiate our advice and our solutions,” says Mr Uva.
So far this year, deal flow has not been as high as bankers had hoped: at least 10 IPOs have been cancelled and, according to KPMG, the number of completed M&A deals is down 25% over the past year, while an uncertain interest rate environment has led many to take a wait-and-see approach to debt capital markets.
But Mr Uva is upbeat. “There is deal activity and confidence is returning. As it increases, we will benefit from the pent-up demand from deals that have been delayed because the environment was not right for execution – such as the Belgacom IPO earlier this year. This is especially true in Europe, where the capital markets are less mature than in the US. There is still a need for fundamental restructuring if Europe is to be competitive globally. Despite the euro and EU harmonisation, this is still a fragmented market and that presents opportunities for us.”
Nonetheless, Europe can be frustrating. He adds: “The big question is how and when? Governments, for example, often do not want to confront problems and I’m not expecting radical changes in terms of policy – governments will be governments. But my optimism is grounded in the inevitable need for change.”
Perhaps such stoicism stems from Mr Uva’s earlier experience in heading Morgan Stanley’s European telecommunications group. He spent 10 years talking to the Swedish government before it privatised state-owned operator Telia. “I’m not saying that I’d like to replicate that gestation period, but I come from a franchise where we had to take the long view. And many of the changes we saw in telecoms in the 1990s – the move from government-owned and highly regulated organisations to privately-owned firms that tap the capital markets and began looking outside their domestic markets – are occurring in other sectors, such as utilities.”
Many investment banks have been gearing themselves up for an eagerly anticipated increase in deal activity from eastern Europe, particularly from the 10 European Union states where accession will require capital spending on reforms, infrastructure and requirements such as NATO membership.
Mr Uva says Morgan Stanley is taking a “disciplined” approach. “Those markets will present some opportunities but the flows will be varied. We haven’t hired significantly to focus on these markets – it has been a case of finding highly regarded locals that will be supported by the broader franchise. It is not a massive build-up. We are not cavalier in terms of resourcing.”
But some may argue that Morgan Stanley has lost ground with this more measured strategy. Analyst house Dealogic’s H1 league tables for emerging Europe debt capital markets do not rank the firm among the top 10 bookrunners, and for emerging sovereigns it comes in at number nine. Mr Uva says that Morgan Stanley expects to be in the top three in any market in which the firm competes. He says the firm takes a very “targeted” approach to these markets. “We want to be a market leader, but we also weigh market share against profitability.”
Although European corporates are now embracing the capital markets more enthusiastically, Mr Uva also acknowledges that success in the investment-grade market is still strongly linked to lending relationships. “I feel happy with what we have achieved in high yield, but investment-grade is a more complicated dynamic – there is a high degree of correlation between lending and market share. That said, I think we are number three in all international bond issues for Europe and I’m proud of that. As importantly, we play a big role in less obvious transactions in the risk management area – such as derivatives and commodities – and I’m happy with that.”
Pole position
In M&A and equity it is a different story. Always fairly dominant in these areas, Morgan Stanley has nonetheless improved its league table positions pretty much across the board between the end of 2003 and this year’s H1 figures. A snapshot of Dealogic’s figures reveals that Morgan Stanley now occupies pole position for global and US ECM, and global, US and EMEA IPOs.
According to US analyst house CreditSights, the firm commands 12.5% market share in European equity underwriting, but several analysts have suggested that Morgan Stanley sacrificed pricing power to secure so many top spots.
Mr Uva denies this. “We don’t lead with price to win business. For example, in risk or bidding situations where there is a bigger chance that you can lose money [such as a secondary share offering] we have made money this year, whereas our competitors sometimes have not.
“Our equity business has never been stronger. This has not really been picked up, even internally, because our M&A franchise has traditionally been so strong. We have done a lot to crystallise our momentum in a way that was not immediately obvious in the post-bubble world because the flow was not there to highlight it. Now that confidence is returning, the level of improvement is clear.”
Career history
2001: appointed head of investment banking, Europe
1999: becomes global co-head of
corporate finance
1996: promoted to head of European
corporate finance
1990: sets up and leads the European telecommunications group
1989: establishes the European
technology and health care practices
1987: moves to London, European
corporate finance
1985: joins Morgan Stanley in the
corporate finance division in New York
1983: MBA, Harvard Business School
1981: joins Bank of Boston as loan officer
1980: MSc, London School of Economics
1979: graduates from Harvard University
