Last week every investment banker was reminded that their biggest nightmare often lies curled up foetus-like within normal business conduct. It doesn’t entail misconduct, malfeasance or misjudgement. It just requires pressing send.
By now, every investment banker knows about the unfortunate Morgan Stanley misfire, in which a senior managing director in Asia-Pacific accidentally sent an internal document containing details of more than 100 potential deals.
Media reports suggested that the document ended up in hundreds of inboxes, and somehow a blurred version ended up on Instagram. Eventually, reporters got hold of the document (which, for the avoidance of doubt, I have not seen).
The episode has been mortifying for the bank and the banker. Many financiers are cringing because deep down they know it could have happened to them. But away from the damage-limitation exercises, the accidental leak throws into sharp relief how an investment bank leverages information to its benefit in legitimate and competitively powerful ways.
By all accounts, the file offered a snapshot of what a top investment bank in Asia-Pacific knew about a swathe of private companies, potential IPOs and various interested parties, including private equity firms and pension funds. I’m guessing most of the information was known in one form or another by its competitors too.
But it’s still a treasure trove because investment banks are a huge repository of information about corporate intentions. Investment bankers spend a lot of time trying to work out which companies intend to go public, which financial sponsors are seeking an exit, what valuation they are targeting, the current project status with the board, whether the board has decided to sell, what the competitive landscape looks like, what the key sensitivities are, and so much more.
Much of this, taken individually, would not necessarily amount to material non-public information (MNPI) from a market abuse standpoint. In fact, a lot of this is probably either trivial, interpretive or contingent. But by putting together the various pieces, the bankers have created a valuable mosaic that may be competitively decisive.
The power of intelligence
Just as banks offer scalability in distribution through their armies of salespeople, they also offer a ready-made intelligence gathering apparatus
It’s easy for financiers to forget how powerful this accumulation of information is. One of the reasons bankers spend so much time pitching to clients is not just to sell products, but also to pick up intelligence that, combined with other clues, builds a picture to enable the bank to position itself as well as possible for a future deal.
Someone may know something about the company, another banker may have inroads with the shareholder, and still another will know about a few members of the board. Good bankers are networkers and talk to everybody, and coordinate with other colleagues who are picking up other information. Every conversation is a key data point.
Arguably, when clients hire an investment bank, they aren’t looking for industry expertise or strategic insight or whatever buzzword is in fashion nowadays. They’re looking for balance sheet, of course, and execution horsepower — neither of which is a real competitive differentiator, if you think about it — but they’re also looking for an information network. Just as banks offer scalability in distribution through their armies of salespeople, they also offer a ready-made intelligence gathering apparatus.
The Morgan Stanley banker’s accidental leak shows that this information network is both valuable and fragile at the same time.
When I first started as an investment banker in the mid-1990s, the information lived in the heads of different colleagues. We prepared pitch books and we had client files, but the institutional memory was distinctly human and small-scale. Someone knew someone else and, if you wanted that information, you had to ask the banker in question, who often guarded the information jealously.
Over time, this has changed. Most banks have systems to track meetings and archive meeting notes, often pulling data directly from Outlook calendars. Pitch books are accessible in shared files. Today that knowledge is everywhere within the bank. And so you have a strange situation where, just as investment banks are implementing more protocols than ever to protect confidential information, that information now sits in a variety of places within the bank, making it more easily accessible to a greater number of people.
The Morgan Stanley incident appears to have arisen out of human error; the banker intended to send one document but sent another. But it has resonated widely because it highlights the vulnerability and strength of an investment bank’s information gathering. What begins as droplets of information becomes a reservoir of confidential data, but a bank’s dams are still liable to burst from time to time.