Morgan Stanley, Goldman Sachs and JPMorgan have a vice-like grip on advising top technology companies. After Uber and Lyft’s weak initial public offerings, rival banks are hoping for an opportunity for some market disruption.
“The quality of deal execution is being called into question more, by both corporates and VCs [venture capital firms],” said David Hermer, head of equity capital markets at Credit Suisse, noting that a “small number of banks have a disproportionate share of leadership roles in technology IPO”.
Prized as much for the reputational halo it offers as the hundreds of millions of dollars at stake in big mandates, the business of taking tech companies public has been highly concentrated since the 2000 dotcom crash, when many banks withdrew from the battered sector.
Morgan Stanley, Goldman and JPMorgan earned 55 per cent of the $400m-plus fees generated by US tech IPOs last year, triple the bounty of the next three highest paid banks, according to data provider Refinitiv. The trio have held the top three places since 2011 with a share that is far larger than the 38 per cent of fees they command in the broader $1.9bn-a-year US IPO fee pool.
The recent post-IPO share price falls in Lyft and Uber offer hope to rivals as they set out their stall to companies such as Airbnb and WeWork that are considering flotations.
History suggests the upstarts face an uphill battle. To dislodge the top three, challengers such as Credit Suisse, Bank of America, Citigroup, Barclays and Deutsche Bank are pitted against some of the most well-connected bankers in Silicon Valley.
“When you’re a tech entrepreneur and you’re taking your company public, introducing new risk into the equation is not something you’re jumping to do,” said Howard Lerman, chief executive and co-founder of Yext, an enterprise software company. “By going with a tried and true [adviser] you are not going to do something crazy.”
Yext’s 2017 IPO was led by Morgan Stanley. Mr Lerman said the longstanding relationship between the bank and his chief financial officer, Steve Cakebread, made it the obvious choice. Mr Cakebread had worked with Morgan Stanley on the IPOs of Salesforce and Pandora when he was CFO of those companies.
“Between those three banks, they keep each other honest,” Mr Lerman said, referring to Morgan Stanley, Goldman and JPMorgan.
The trio benefited as some rivals retrenched after the financial crisis; they also capitalised on demand for additional services from tech companies who were staying private for longer. Private placements were particularly popular, such as the 2015 $1.6bn private placement that Goldman led for Uber. It was a deal that was backed by Goldman’s own private wealth clients.
“We have been long-term players in this industry,” said Dan Dees, co-head of Goldman’s investment banking division. “We have committed resource. We have kept our people here. We have maintained the commitment to the business through the lean times.”
Goldman and Morgan Stanley bankers were roaming Silicon Valley in the 1990s when tech underwriting business was most associated with the “Four Horsemen” — boutique investment banks Alex Brown, Hambrecht & Quist, Robertson Stephens and Montgomery Securitiel — which have long since been taken over by bigger institutions. Morgan Stanley alumni from that time include the noted venture capitalist Mary Meeker.
Goldman is also a prolific early investor in tech companies, getting in early with household names like Spotify and Uber as well as less well-known potential IPO candidates such as $2.65bn banking technology firm Plaid. Morgan Stanley was also on the pre-IPO roster for Spotify and numerous other unicorns, including cloud storage venture Dropbox, which listed for $9.2bn last year.
While rivals have come close to the top of league tables based on the volume of cash raised by clients, Morgan Stanley, Goldman and JPMorgan earn the lion’s share of the fees. Take Uber, where Morgan Stanley, Goldman and Bank of America will share more than $100m in underwriting fees. Morgan Stanley, which led the IPO, will earn nearly twice as much as Goldman and roughly four times BofA’s payout.
“There is never a dearth of additional voices that an issuer can tap if they choose to,” said Liz Myers, global head of equity capital markets at JPMorgan. “But they tend to rely on people and views at firms that have the longest record of doing deals in their space.”
In some ways JPMorgan is the successful challenger. Since 2000 it has muscled into what some bankers described as a cosy duopoly between Morgan Stanley and Goldman. Its push has been partly fuelled by its ability to lend, using the biggest bank balance sheet in the US, and the provision of other services like cash management and private banking.
Star bankers also reinforce the status quo. Morgan Stanley has Michael Grimes, who led the charge on Uber as well as IPOs for Google, Facebook, Snap, Twitter and LinkedIn. Goldman has Nick Giovanni, adviser to everyone from Expedia to Skype and Credit Karma, and Kim Posnett, who worked on Uber’s IPO. JPMorgan has Noah Wintroub whose big clients include Pinterest and Lyft and Michael Millman, who has advised Dropbox and SurveyMonkey.
European rivals who once boasted star bankers have struggled to replace them. That includes Imran Khan, the Credit Suisse banker who led Alibaba’s IPO, and Frank Quattrone, a leading Silicon Valley player who left Credit Suisse in 2003 during a criminal investigation and later founded investment venture Qatalyst. Painful restructurings curbed European banks’ enthusiasm for investing in Silicon Valley.
“European firms, let’s face it, they have been under a fair amount of latter-day challenges than the US [banks] that got their footing in the last five years,” said one Deutsche Bank banker. “There has been a little bit of distraction in investing in the business and turnover.”
The relatively small number of tech IPOs is another barrier to entry. A senior banker at one of the big three firms said it would be difficult for other banks to make serious inroads while the volume of tech IPOs each year remains around 30 or 40, versus the 100-plus IPOs each year a few decades ago.
Rivals disagree. Gary Kirkham, co-head of BofA’s global technology, media and telecoms investment banking group, said his banks’ deal backlog suggested that the tech IPO market had become a “four-horse race”.
“We’ve got something like 16 IPO transactions on the go right now,” he said.