You Scratch My Back, I'll Scratch Yours

Morgan Stanley is at the center of the latest media outrage about how business is done. It seems that there is an email trail saying they would buy equipment from vendors in order to curry favor for investment banking. Paul McDougall writes a venomous post on the InformationWeek blog (http://www.informationweek.com/blog/main/archives/2006/03/morgan_stanley.html) about it.

Here is an outsized quote:

If I'm a Morgan Stanley shareholder, I want to know that the company is spending money that I've invested on capital equipment and services that are the best available at the best price. I don't want these decisions influenced by the fact that some banker stands to make a few mill on a bonus for getting the underwriting business.

Sure, winning new business helps the firm's top line, but that doesn't do shareholders any good if the bottom line is sacrificed on unnecessary IT equipment and services in order to get that business. Then there is the larger effect on competition. It would be tough for new, innovative products to come to market in the financial services sector if the price of entry is always the expensive banking services and financial instruments that your potential client is trying to sell. Taken to an extreme, this sort of behavior raises anti-trust issues. At lesser levels, it's just bad business.

Wow. What a naive, idealistic position to take. I don't know anything about this guy's background, but it sounds like he's never spent any time in a real business environment where real people are responsible to generate real revenue for real companies that have to pay real employees in real dollars. If there's one thing I've learned - idealism pays like crap.

Let's deal with reality: Morgan Stanley did nothing that every other company doesn't do in order to keep the lights on. The fact that Morgan's lights are more expensive and therefore the deals are bigger and the bankers make millions are of no import. These deals happen all time. Every day, in every corner of the world.

Why? Because business is about winning. Sure, kumbaya - let's do everything for the shareholder. Fact is, if Morgan doesn't get those i-banking deals, they don't generate a return for the shareholders. If Morgan doesn't generate an adequate return, their stock goes down and those very shareholders he's worried about lose. A market-based economy ensures that. Even if they save two nickels on a PC.

To be clear, every vendor contemplating any kind of investment banking transaction pulls the same shenanigans. I've been with 3 companies that did the dance of going public (META Group even got the deal done). You can be assured that any bank that was seriously courting our business was our buying products or services. That was the cost to get in the game. I remember the CEO of company literally calling up his i-banking contacts in the midst of a hotly contested deal and said we'd pull the IPO deal if we didn't win their business. To single out Morgan Stanley is ridiculous. Everybody does it.

I hear the retort already: Just because everybody does it, doesn't make it right. I agree, but in this case it is right. If I'm going to spend $15 million to have someone underwrite an offering, you bet I want them as a customer. It only becomes challenging when you do business with all the banks, then you actually have to pick based upon capabilities - instead of favoritism. Yes, that comment was tongue firmly in cheek.

It will be entertaining to see the media spin up about this issue over the next few days. The idealists will be out in force vilifying everyone that does business based upon who you know and what you've done for them. And it won't make a damn bit of difference. The capitalists will continue to do business as they have for hundreds of years. Because that's the way it works in the big city.