Tongues were wagging last week when J.P. Morgan & Co. ended its role as an adviser to ailing Olympia & York Developments Ltd.
Though Morgan said its assignment was complete, the talk on the street suggested that Morgan's lending relationship with Olympia made it difficult to continue as an adviser.
Role in Bankruptcy
Bankers no doubt noted that a bank group led by Morgan had threatened to seize collateral on a $160 million loan in May, helping to nudge Olympia into bankruptcy proceedings.
Whatever happened in the Olympia case, there is no question that Morgan increasingly finds itself balancing multiple roles as lender, underwriter, and adviser.
Generally, the bank has done an impressive job, using its recently granted underwriting powers to act as lead manager on $6.1 billion of debt and equity deals in the second quarter. That was good enough to put Morgan among the top 10 brokerage houses for the period.
Grumbling and Caution
But inevitably, there are howls of foul play from competitors, who charge that Morgan is unjustly using its lending muscle to get underwriting business.
These complaints could be dismissed as envy, of course. But Morgan is taking pains to ensure that its bankers stay on the right side of rules that bar them from linking lending to the purchase of other services. The main laws in this area are found in amendments to the Bank Holding Company Act.
"The last thing they want to do is create the image that a client firm could have a credit relationship held hostage for other business," said Judah Kraushaar, an analyst at Merrill Lynch & Co.
As more banks move into underwriting and other businesses, Morgan's strategy could prove to be a bit of trailblazing for the industry. In a deregulated environment, bankers must cross-market securities services and banking products, being careful all the while to toe the ethical line.
By contrast, nonbank competitors such as Merrill Lynch or First Boston are not so tightly restricted under law. They are freer to lend funds and underwriter securities as they see fit.
Appearances a Problem
At Morgan, it has not always been easy to avoid the appearance of conflict. One regional banker, speaking on condition of anonymity, said he felt pressure to give the his company's corporate finance business to Morgan when he was renegotiating some backup lines of credit. He took his loan request elsewhere.
"It's easy for people to perceive a hidden threat there," one Morgan banker conceded.
But the fact is, plenty of Morgan's long-term clients are happy with the company's broadened powers. The bank already participates in both underwriting and lending relationships with outfits ranging from General Motors Corp. to Hospital Corp. of America.
Indeed, Morgan's debut as lead underwriter of an initial public offering occurred on June 17 with a $157 million offering for Riverwood International, a unit being partially spun off by Manville Corp. Asked why the company selected the commercial bank for the underwriting, a Manville official said directly: "We've been with Morgan since the Depression."
Rite Aid Corp., another client of long standing, tapped Morgan to co-manage a $136 million stock offering last year. Morgan has been lead bank on a $400 million Rite Aid loan facility and has done banking business with the company for more than 20 years.
Said Frank Bergonzi, treasurer of the Pennsylvania-based drugstore chain: "We felt [Morgan] had a good niche with institutional clients."
Though the bank makes the most of its blue-chip corporate client list when soliciting new kinds of business, it also has sold its lending and investment banking wares simultaneously to new customers.
Morgan provided a $1 billion bridge loan to Valores Monterrey SA, a Mexico-based conglomerate that in 1991 bought Bancomer, Mexico's second-largest bank, from the government. Morgan also was named agent on a $120 million private equity placement for Bancomer and structured a $1.13 billion global equity offering for the bank.
Half a dozen firms vied against Morgan on the equity deals, and grumbling was widespread that Morgan's victory was tied to its granting of the bridge loan.
"If they were good at this, it'd be one thing," said one disgruntled competitor shortly after Morgan nabbed the equity offering. "But they're really not."
But Morgan had the last word. The equity offering was increased in size because of ample investor demand.
Javier Fernandez, director of planning at Bancomer, said the bank's choice of investment banker "had nothing to do with the lending relationship."
The Bancomer deal taught Wall Street a lesson about Morgan, some observers said. "They are clearly a power to be reckoned with," said Thomas Hanley, an analyst at First Boston Corp. "Roberto Mendoza is awesome," he said, referring to the Morgan vice chairman who has been leading Morgan in its Latin America ventures.
Rescue in California
Morgan has also made its mark domestically. Early last year. Security Pacific Corp. found itself with a problem. The faltering California bank worried that it couldn't find investors willing to roll over some $5 billion of commercial paper. Morgan stepped in with a solution.
It led a group of banks that gave Security Pacific a line of credit for more than $1 billion, according to a banker familiar with the situation. Soon after, it was named an agent on Security Pacific's medium-term note program. Morgan also underwrote $150 million in notes for Security Pacific in February.
"Morgan is very good at leveraging these credit relationships," said a banker who has worked with the company. "When Morgan comes to the rescue [with credit], they have quite a nice call on a firm after that."
Some Morgan bankers say that the company has by now built such a strong name in investment banking that it can forgo the loan connection.
"The securities business has now got enough strength of its own that it's business we can get in the door with," said Joseph Cook, managing director and head of syndicate at J.P. Morgan Securities Inc.
Nevertheless, insiders say that Morgan prides itself on a culture that allows it to successfully work many sides of a relationship.
One reason is that, unlike many of its Wall Street competitors, Morgan does not encourage a star system. "We insist on teamwork to make the full range of our capabilities available to our clients." Morgan boasted in its 1991 annual report.
Morgan believes in growing its own bankers, recruiting them from business school and promoting almost entirely from within.
Teamwork on Derivatives
As part of their training program, new bankers are sent on a four-day expedition to the woods, where they build rafts, scale slippery walls, and - in their leisure time - discuss leadership styles. The intent of this Outward Bound-type orientation: Learning that cooperation and teamwork make for good business.
Morgan's flourishing derivatives business illustrates the power of working together, said Peter Bennett, a managing director and head of global swaps. He pointed out that derivatives traders and marketers interact continually with bankers in capital markets, private placements, syndicate, and corporate finance.
"The idea is always that someone one is talking to a client on the overall interest-rate outlook will talk about bonds and derivatives and hedging products," Mr. Bennett said.
To further such alliances, his unit is setting up a four-person group to hold seminars on swaps for Morgan bankers and clients.
While such efforts make good business sense, they also make it doubly important that Morgan police itself on its dual assignments.
The questions will always arise: Can Morgan steer employees who are on a loan workout committee away from learning about their colleagues who are advising the borrower? Can it sever the team relationship when laws forbid a lender from sharing its information with an investment banker?
Morgan executives say they can. In particular, they defend the Olympia & York situation as proof that the bank can handle multiple assignments, pointing out that a Morgan-led lending group was tough with Olympia & York even as another part of the bank was advising the company and seeking leniency from creditors.
"From a marketing standpoint, the ultimate test is whether as adviser you'd be willing to see a company go into bankruptcy even if you have a credit relationship with the company," said one Morgan banker.
Still a Balancing Act
Right now, there is no sign that the difficulties of cross-selling will ease. Morgan, for example, is making a major push in emerging markets, where some potential clients may misinterpret the intent of calls from Morgan lenders and investment bankers.
"As they're getting into areas of the world where people have less access to credit, people might begin to impute pressure even if it's not Morgan's strategy," said Merrill Lynch's Mr. Kraushaar.
But he pointed out that Morgan's high credit standards would tend to limit the bank to dealing with customers that have plenty of funding alternatives.
Even the domestic banker who walked away from Morgan when he detected investment banking pressure complimented the company on its double-barreled strength.
"You can't really fault the strategy," he said. "They've got the expertise they've got the experience, and . . . they've got the credit rating."