When NCNB Corp. chairman Hugh McColl wanted to buy C&S/Sovran a year ago, he dropped Merrill Lynch & Co. as investment banker and turned to Morgan Stanley.
The assignment was an important vote of confidence in Morgan at a time when investment banks were proving crucial in consolidation of the U.S. banking industry.
In this, the first of a six-part series on t o d a y's Match-makers, we take an in-depth look at Morgan Stanley & Co., its virtues and its flaws.
Though the acquisition of C&S/Sovran Corp. was the third largest in banking history, Mr. McColl didn't need Morgan's analytical advice on the deal. He needed its contacts and tactical counsel. And maybe he needed a little of Morgan's polish, too.
Taking the Wrong Tack
When Mr. McColl had made a run at C&S two years earlier, his take-no-prisoners approach drove the Atlanta-based banking company into the arms of Virginia's Sovran Financial Corp. in 1989.
This time around, he knew he needed a new approach. Morgan was familiar with C&S/Sovran's key players, having done investment banking business for several of its board members.
The firm's team recognized that C&S/Sovran's directors were split, with loyalties depending on whether they came from the former Citizens & Southern Corp. or from Sovran. That made the bank susceptible to a takeover if approached calmly, Morgan reasoned.
Mr. McColl and his mergers and acquisitions team hammered out a plan - who at C&S/ Sovran to approach, what to say, how to respond to their concerns about compensation, control, and other issues.
Mr. McColl, the point man for all negotiations, continued on his around of chats with board members and top managers. This time, he was all smiles and sound business arguments. No ultimatums or arm-twisting.
A Charmer by Design
"Hugh can be very charming when he wants to be," said Donald A. Moore Jr., leader of Morgan Stanley's bank acquisitions group.
Morgan approached the directors it knew and explained the benefits of the merger.
The bank's team met with Morgan every Monday morning in Charlotte, N.C., NCNB's headquarters city, to review the deal's progress and set strategy. Mr. Moore and his team spoke daily with either NCNB chief financial officer James Hance or executive vice president Frank Gentry. Last August, the merger was announced.
Some observes think C&S/ Sovran was more worried about its bad real estate loans when Mr. McColl knocked at its door the second time. But lawyers close to the deal credit Morgan Stanley's strategy.
"The bottom line is, the second time was a success, and the first time was a failure," said one lawyer. "The banks were the same; the lawyers were the same. The one thing that changed was the investment bank."
Mr. Moore said Merrill Lynch had misjudged the mood of C&S' management and directors in NCNB's first approach and had not thought through the deal's financial structure.
Merrill denies Mr. Moore's charges. "I don't think Morgan did anything differently than we did," said Edward S. Annunziato, managing director of investment banking for Merrill Lynch Capital Markets, New York. "It was just a different set of circumstances. C&S/Sovran was a troubled company the second time around."
Bankers at NationsBank Corp., as the combination of C&S/Sovran with NCNB is now called, declined to comment.
A Prosperous Year
With the NationsBank deal, Morgan's bank mergers team was able to achieve a spectacular year in 1991, earning $73.1 million in fees, just below the $76.8 million garnered by the leader, First Boston Corp.
Morgan Stanley completed just seven deals last year, but three were the biggest U.S. bank mergers ever. In addition to NationsBank, Morgan was involved in the BankAmerica-Security Pacific deal and the Chemical Banking Corp-Manufacturers Hanover Corp. merger.
Under Don Moore, Morgan Stanley's banking practice has earned a reputation not only for savoir faire and smarts but also for high integrity. To the chagrin of several bankers involved, this integrity helped derail an attempted merger between Bank of Boston Corp. ad Shawmut National Corp.
At a tense meeting of Shawmut's board just days before announcement of the combination was planned, Mr. Moore stood up and said the deal wasn't good enough. He said Bank of Boston's burgeoning bad loans made its $1.8 billion stock offer for Shawmut too skimpy. Shawmut went back to the negotiating table but eventually scuttled the deal.
Pariah in Beantown
"I'm persona non grata in Boston," said Mr. Moore.
The Bank of Boston episode was not the only time Morgan Stanley has said "no." Some clients don't like that kind of advice. "It gets us fired." said Mr. Moore.
For example, Southeast Banking Corp. showed Morgan Stanley the street. The Miami banking company, acquired by First Union Corp. last year in federally assisted transaction, wanted Morgan Stanley to give its blessing to several planned purchases of thrifts. Morgan refused. Southeast fired the firm.
But, in fact saying no has added to Morgan's reputation. Shawmut did not fire the adviser after it helped derail the Bank of Boston deal, and Joel B. Alvord, Shawmut's chairman harbors no grudge against Morgan. In April, he made it sole manager of a $173 million equity offering.
Praise for Advice
And some more bankers have ended up appreciating Morgan Stanley's bluntness. Last year, for example, the top management at Crestar Financial Corp., Richmond, Va., considered offering stock in its mortgage banking business. A Morgan Stanley team nixed the plan, saying the public appetite for mortgage company stock was sated. Besides, Crestar didn't have a plan to put the new capital to good use.
"That turned out to be good advice," said C. Garland Hagan, executive vice president at Crestar.
AmSouth Bancorp., Birmingham, Ala., also uses Morgan Stanley for M&A advice, and on several occasions the firm pointed out holes in Amsouth's plans. "We don't want someone to tell us what we already know,: said C. Stan Bailey, chief financial officer at AmSouth.
Mr. Moore's approach also draws praise from other merger specialists. "He will stand up when he believes the client is acting incorrectly and tell him so, firmly and clearly," said a lawyer who specializes in mergers. "Many other investment bankers would be steamrolled into doing what the client wants."
A trim six-footer, Mr. Moore, 41, joined Morgan Stanley 17 years ago out of the Harvard Business School. He has specialized in the banking industry his entire career, and clients often remember him from when he was just a soldier in the ranks. He became the head of bank M&A work five years ago. He considers last year the most exciting time in his career. It most likely produced his biggest paycheck as well, but he won't divulge his compensation.
Indeed, merger work can be a very lucrative business, and and some bankers think their advisers are overpaid. Mr. Moore's response: Only about one in 10 deals are works on ends in a merger." Some people complain about the success fee, but no one is going to pay a $1 million advisory fee for a deal that didn't go through. We'd go broke on the advisory fees we charge for failed transactions.
Along with its success, Morgan Stanley has attracted some criticism.
In the Shawmut deal, some lawyers and bankers think the investment Bank of Boston's loan woes. And since the talks broke off, Bank of Boston has been able to get its bad loans under control and raise equity from a stock sale.
What's more, some merger specialist think Morgan Stanley should have advised bankAmerica to lower the Security Pacific price after the Los Angeles bank's real estate lending problems became public. Mr. Moore said the price took into account Security Pacific's problems, which were apparent before the merger agreement was signed.
In addition, rival investment bankers point to the $250 million debt deal Morgan underwrote for Bank of New England Corp., three months before it was seized by regulators.
The rap is that Morgan should have recognized the liquidity and loan problems that later brought down the bank. Bondholders are suing Morgan Stanley, which denies any wrongdoing.
Role in Chemical Deal
While not a criticism, how much Morgan Stanley was involved in the Chemical-Manufacturers Hanover deal is a matter of debate. Mr. Moore said that Morgan Stanley was deeply involved in Manufacturers Hanover's planning and strategy even before he was hired to render a fairness opinion.
Other participants, however, say Morgan only rendered a fairness opinion and set the sale price. Manufacturers said it worked closely with First Manhattan Consulting Group on the strategy of the acquisition.
"We called Morgan in after it was a done deal, maybe three weeks before the papers were signed," said a Chemical executive who asked for anonymity. "Almost everything was settled except the price.
Morgan's bank M&A work has slowed to a trickle this year. That's not surprising since many of its big bank clients are digesting last year's acquisitions. Instead, Morgan has helped orchestrate some small deals, including the sale of BankAmerica branches in Washington and Arizona and First Interstate Bancorp's sale of a merchant banking unit to Standard Chartered Bank PLC.
Mr. Moore said the year isn't over yet. He has heard more merger talk among clients this year than last year. And when the merger fever rises again, Morgan Stanley's track record and reputation for independence is sure to stand it in good stead.