Betting on basics: An investment banker goes public with what appeals to financiers

Named one of "America's 50 Most Powerful Women" by Fortune magazine, Cristina Morgan has represented her firm on more than 100 IPOs for such familiar names as Adobe, Google, Pixar and Netscape. Recently she was inducted into the W. P. Carey School's Alumni Hall of Fame. Here, Morgan talks about the role of the investment banker, and weighs in with some advice for individuals interested in making their own stock picks.

"Investment banking careers are like playing for the NFL," says Cristina Morgan, vice chair of JPMorgan Chase & Co., a leading financial services firm. "You're supposed to get in and get out in 15 years." That may be the rule, but Ms. Morgan has broken it. She freely admits that the fast-paced, high-stress, i-banker lifestyle is unsuited to career longevity. "It's a young man's game," she says. Still, she's been a player for 24 years.

During them, Morgan has represented her firm on more than 100 IPOs for such familiar names as Adobe, Google, Pixar and Netscape. Fortune magazine named Morgan one of "America's 50 Most Powerful Women." Working Woman called her one of the "Top Ten Women in Technology." Town & Country magazine dubbed her one of "The Wonder Women of Silicon Valley."

And recently, she was inducted into the Alumni Hall of Fame at the W. P. Carey School of Business. Investment bankers like Morgan put together financing packages for businesses and governments, often by floating a bond or stock issue. That means they handle the details of getting a company ready to approach public markets through the New York Stock Exchange or NASDAQ. Morgan's practice focuses on the technology growth sector of the stock market.

"When you finance a company in the public markets, you're doing it with other people's money," she says, "and that comes from mutual funds or pensions. You have a real responsibility to assess the situation correctly." It's up to the investment bankers to dig through a company's balance sheet, evaluate products, assess markets, size up the management team, then set a fair price on equity shares as they go to market.

So, what exactly does a seasoned i-banker look for when gauging a company's stock market potential? It's pretty straightforward, Morgan maintains. Innovative products and terrific management teams are part of it but, at bottom, revenues and profit potential will make or break a deal.

Yeah, right

Asked what pointers people should consider when presenting their business to investment bankers, Morgan says, "Stick to the facts." She recognizes that people are in "marketing mode" when they come to her, and she maintains that, "Marketing often involves a little hyperbole." Still, it's unlikely you will sway an experienced financier with exaggeration and salesmanship. "Instead of going on about your vision for world peace through your product, you might simply say, 'It connects this device with that device,'" Morgan notes.

"We've all heard the world-peace strategies 14 times. Don't waste our time. Just tell us what you do." According to Morgan, investment bankers are "extremely realistic about the risks associated with investing." Risk involves balancing pros against cons and assets against liabilities, she explains. And, risk involves speculating about the future, which Morgan says holds more bumps in the road than easy paths.

"I don't think it would surprise anyone who has lived any sort of life at all that negative risks far outweigh positive risks in any situation." This view may sound a little skeptical, and Morgan admits that it is. Listening to her recollections of deals past, you gather that hers is a numbers-driven business where smart participants watch facts, not fads. Morgan, for instance, is credited in the popular press with backing software companies during the 1980s, when hardware firms were all the rage.

This "legend" slightly irks her. She feels it implies that she was somehow more adept than other investment bankers, a view she declares "patently ridiculous." "It is true that, in the early 1980s, hardware was having a particular run," she says, pointing to Apple and Sun as two companies that went public in that time frame.

"Hardware companies were definitely thought of as a good place to be." Even so, Morgan says the wisdom attributed to her stems from a casual remark she made about how she'd rather invest in software. Her reason? "Hardware companies have very low gross margins. If they're lucky, the gross margin is 50 percent. Software companies, by nature, have 90 percent gross margins." According to Morgan, this is something many people could, and did, figure out. "In my business, this is dead-flat obvious."

When small is beautiful

Software's margins were one factor that induced Morgan and her colleagues to take Adobe public when the company was too small to catch most i-bankers' attention. This happened in 1986, when Apple Computer had just licensed Adobe's PostScript page-description language for use in its LaserWriter printers and, therefore, had to pay royalties to the fledgling software firm.

"As a result, when Adobe was a very small company, it was massively profitable because the cost of goods sold wasn't very high," Morgan says. She continues: "We looked at the growth rate, which we believed to be very high." It was. "We believed the profits would stay enormously high." They did. She also maintains Adobe's founders were geniuses, and the business model was "unassailable."

It is this type of analysis that investment bankers use in valuing companies and projects. What makes i-bankers take a pass? Undifferentiated products, low-quality products, limited markets, mediocre management, dishonesty and, of course, numbers that fail to impress. Any one of those things could doom a deal, according to Morgan.

Taking it home

If you're investing in the stock market yourself, is it wise to look at the investment bankers who put the deals together? Yes, but only in the extremes, says Morgan. Big names — the JPMorgans and Goldman Sachs types — might rightfully instill some confidence in individual investors. However, if you're thinking of buying a stock and you go back to see who took the company public, then you find it's "Bupkis Securities," you might want to look into it a little more closely, she adds.

Suppose Bupkis Securities is run by three guys in Florida who've only done one deal before. "That might give you the hint that the company wasn't taken public by the most experienced of investment bankers," she says. In the middle ground, Morgan notes, it's hard to tell if the i-banker makes a difference.

"Good companies do go public with lesser-known investment bankers from time to time." That said, she has another word of advice for individuals who want to dabble in public exchanges: Don't. "Individuals should never buy stocks individually because they'll never do enough work to equip themselves with the information to do that," she maintains.

"Professionals do a bunch of work before they make decisions." If you're on your own, Morgan sees only one smart way to play the market. "Buy mutual funds," she says, and let the professionals make the stock picks.

Bottom line: one i-banker's view

• Investment bankers look at many factors when valuing companies in preparation for taking them public.
• Innovative products, top-tier management, and smart business models are among the things investment bankers seek, but revenue growth and profit potential matter most.
• Investment bankers are savvy and skeptical, so those who approach them should stick to the facts.
• If you want to invest like a professional, hire one by putting your dollars into a mutual fund.