August 21, 2000

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Banking On B-To-B

Morgan Stanley Dean Witter has thrown both its reputation and its money behind industry-led business-to-business exchanges

By Chris Murphy

More on Morgan Stanley:

Phillips: Morgan Stanley's Man In The Know

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n mid-March, John Joyce, IBM's chief financial officer, called some key staff members to a breakfast meeting in Armonk, N.Y. Prompted by the surprise partnership in February of DaimlerChrysler, Ford, and General Motors to build an online marketplace for the automotive industry, Joyce wondered if IBM shouldn't be doing something similar in its business. The answer was yes, and within two months IBM had recruited Hitachi, LG Electronics, Matsushita Electric, Nortel Networks, Seagate Technology, Solectron, and Toshiba to contribute $120 million to form an online marketplace for the computer, electronics, and telecommunications industries. A central player in the deal, starting from that first breakfast meeting: investment bank Morgan Stanley Dean Witter.

The IBM deal isn't the investment bank's only marketplace effort. Morgan Stanley has emerged as a behind-the-scenes deal maker or adviser in no fewer than nine electronic marketplaces, including the auto-industry exchange, Covisint, that spurred IBM. Morgan Stanley also has a hand in others that have yet to be announced. And the investment bank was an adviser in the computer, electronics, and telecom marketplace called E2Open. "We knew they had been involved in the automotive exchange, and we wanted to bring in their experience," says Paul Sterne, an IBM executive who became CFO of E2Open. "At the time, they were the firm with the most experience."

Along with venture-capital firm Crosspoint Ventures, Morgan Stanley invested $80 million in E2Open, showing that independent financial investors also back the concept. The goal was to create an exchange affiliated to the industry, but operating independently. "This had to be something for the industry, and they lent credibility to that," Sterne says.

As companies come to realize the potential impact of online exchanges, Morgan Stanley is using its investment banking relationships to get in at the planning stage. In doing so, it's leveraging its ties to the technology world, where Morgan Stanley trails only Goldman Sachs in IT-related equity offerings.

"They seem to have a hand in every one of these business-to-business plays," says Jeff Sprecher, CEO of Intercontinental Exchange, a new commodity exchange that includes BP Amoco and Royal Dutch Shell. "However they built that [reputation], everyone talks about them when it comes to B-to-B exchanges."

Morgan Stanley did it by arming the investment bankers who meet with business executives with a common message, one spread through a three-hour "business-to-business boot camp" that an estimated 2,000 bankers attended in March. The theme: Industries will find they need one common E-business exchange through which to conduct transactions. Industry giants can cooperate to build that marketplace, or they can risk letting a startup gain critical mass and capture the value of that channel.

"A dot-com can build liquidity while you're still trying to do something on your own," Morgan Stanley software analyst and managing partner Charles Phillips says. "Your spending will make someone else rich, basically."

In addition to Covisint and E2Open, Morgan Stanley was involved in the launch of Forest Express, an exchange for the forest products industry; Pantellos, an exchange for the utilities industry; and E-marketplaces in the aerospace, energy, and chemicals industries, among others. Morgan Stanley's role has varied with each--catalyst, matchmaker, strategic adviser, technology consultant, or traditional investment banker.

Morgan Stanley isn't alone among financial firms attempting to wedge themselves into the business-to-business trend, both for near-term business and potential long-term payoff. In mid-June, Goldman Sachs created a company called iFormation with management consulting firm Boston Consulting and venture investor Atlantic Partners, to ally with companies to build Internet businesses. Consulting firm Bain & Co. has joined with Silicon Valley venture capitalist Kleiner Perkins Caufield & Byers and corporate buyout specialist Texas Pacific Group in a similar effort. And a relationship between Accel Partners, a venture capital firm, and buyout firm Kohlberg, Kravis, Roberts already has inked several financial partnerships--including one with McDonald's Corp. to create an Internet platform for the food industry.

These companies are all betting on a specific kind of E-marketplace--one that involves industry leaders with global brands, capable of bringing market knowledge and huge transaction volume to a supply-chain marketplace. The thinking is that these high-volume, industry-specific marketplaces will let companies do business differently--for example, by knowing more about what suppliers are capable of doing, a company might outsource a part of its business that it now deems too difficult to coordinate.

But unless an industry's buying and selling is concentrated on one or two large exchanges, the transparency to allow for that kind of decision making doesn't exist. And unless an exchange has critical mass, it won't succeed, regardless of whether it's industry-backed or an independent startup. That's why Morgan Stanley is pushing hard on exchanges that are independently run but backed by big industry players. "If there are 1,000 of these, there's probably 950 that don't have credible industry support," says Mahmoud Mamdani, a managing director at Morgan Stanley. "We're building the New York Stock Exchange, not the Vancouver Stock Exchange."

The first step in building support for cooperative B-to-B exchanges is winning over the executives and managers of the leading companies in the industry. At aerospace company Raytheon Co., E-business supporters enlisted the aid of a decidedly old-economy tool: a 400-page book printed on plain old paper.

Charles Phillips, Morgan Stanley's enterprise software analyst, teamed with Mary Meeker, the firm's star Internet analyst, to publish the in-depth research report that outlines the firm's thinking on business-to-business exchanges. When Chris Bade, Raytheon's VP of strategic planning and business development, was trying to convince colleagues this spring that it might be a good idea to work with competitors such as BAE Systems, Boeing, and Lockheed Martin on an E-marketplace, he handed out dozens of copies of the book. "We said 'Read this, and you'll have a better idea what we're trying to do,'" Bade says. "Some of our most senior management read that book."

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Photo of Sprecher by Robin Nelson

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