The Amazon Queen: Will Morgan Stanley’s Meeker and Amazon’s Bezos Stay in Love?

The sun may have been ascendant in Scottsdale, Ariz., last

week, but the mood was glum. The scene was the

tech confab of the year: Morgan Stanley Dean Witter’s Internet, Software and

Networking Conference. But with the Nasdaq on its back, who could blame

investors for feeling a bit dyspeptic? And on this day, there would be no trips

to the golf course: Amazon founder and chief executive Jeff Bezos was to give a

rare in-person presentation. What a year it had been-Amazon’s stock was down 80

percent in 2000 as losses continued to mount. Could it really be that Amazon,

too, would run out of cash? Etoys had failed, so had Priceline. There was no

way Amazon would fail, was there?

Introducing Mr. Bezos would be Mary Meeker, Morgan Stanley’s

star Internet analyst. Dour and plain-spoken, her hair short, her clothes

sensible, Ms. Meeker came up to the dais. “I, for one, was happy, for a variety

of reasons, that the stock [Amazon] wasn’t down today,” she joked a touch

darkly, as Mr. Bezos, gnome-like and bouncy, waited in the wings for his cue.

She paused a beat. “And hopefully, it won’t be down after your presentation.”

Laughter. Mike Nichols and Elaine May they aren’t, but Mr. Bezos and Ms. Meeker

do know how to warm up an investor conference. They have been doing it for

years.

In many ways, the relationship between Amazon’s founder and

Morgan Stanley’s supernova of an Internet analyst has defined the boom and bust

of the tech experience on Wall Street: You could not have had one without the

other. Mr. Bezos had a dream, a U.R.L. and a ravenous need for capital. Ms.

Meeker, through Morgan Stanley, had access to the funds, plus the savviest of

pitchman smarts to make Mr. Bezos’s dream a reality. She graced the cover of Barron’s and was dubbed the “Queen of

the Net”; he, famously, became Time magazine’s

“Man of the Year.”

And while Morgan Stanley may not have taken Amazon

public-they turned the deal down because of opposition from Leonard Riggio,

chairman and chief executive of Barnes and Noble, then a Morgan Stanley

client-its financial support and cheerleading has been unswerving. Morgan

Stanley has underwritten more than $2.5 billion in bond deals for Amazon over

the past year, and Ms. Meeker remains one of a shrinking group of Internet

analysts who have yet to downgrade their Amazon rating-notwithstanding the

stock’s fall last year from a high of $91 to the current $18 and change.

Everyone made out. Amazon got an inflated stock for its

acquisitions, not to mention $2.5 billion in cash to finance expansion; for Ms.

Meeker, fame and a $15 million payday in 2000; and for Morgan Stanley … fees,

fees and more fees. The relationship ran deep. Ms. Meeker was a ski buddy of

Amazon’s original chief financial officer, Joy Covey. What’s more, Amazon’s

current treasurer and liaison to the investment-banking community, Russ

Grandinetti, worked as a research associate for Ms. Meeker before moving to

Amazon in the fall of 1997.

So as Amazon’s stock plunged last year, tongues began to

wag. (“Did you hear?-Jeff is pissed at Mary and Morgan Stanley.”) First off,

there was the Barron’s interview with

Ms. Meeker that ran in late December 1999, in which Ms. Meeker had forecast

sales of $1 billion for the fourth quarter of the year, raising street

expectations that were quickly dashed when sales came in at $300 million less

than her prediction. Mr. Grandinetti was irate. The Monday following the

article, he was hit with a barrage of calls from Amazon analysts, all asking

the same question: $1 billion dollars? It was a number way higher than the one they had. Morgan Stanley was Amazon’s

banker-could the number be true? Said one analyst who called Mr. Grandinetti

that Monday: “He was really angry. I remember him saying: ‘I’m pissed. Where

did Mary come up with that ridiculously high number? She is just setting us up

to fail!'” Which, indeed, Amazon did, when the sales came in at $676 million.

Investors were shocked, and the relentless selling of Amazon, then trading in

the 70’s, began.

The second blow came in late June. Once again, the stock was

getting whacked-this time after Lehman Brothers credit analyst Ravi Suria

insinuated that Amazon could indeed go broke. In comments made at a morning

meeting to the Morgan Stanley sales force, Ms. Meeker suggested that Amazon

might not hit her estimates, causing the stock to dip even further. Portfolio

managers were not happy and called up Morgan Stanley to complain-what was Ms.

Meeker doing talking down Amazon to the sales force? Didn’t she know the weight

her words carried in the marketplace?

And while she refused to change her “outperform” rating, her

public support for the beleaguered stock was anything but vocal. While she did

issue four separate pieces of research last year, none were accompanied by

press releases, muting their effect. Compare that to Goldman Sachs analyst

Anthony Noto, who, in the last six months of the year (during which the stock

sank 70 percent), issued six different pieces of research maintaining his

trading buy on each occasion before he finally downgraded this January.

To the naked eye it seemed obvious: Goldman Sachs, shut out

so far from Amazon investment-banking business, was making its play. There was

talk of a private placement-a select equity offering, managed by Goldman

perhaps, that would provide a much-needed cash infusion. It made for good copy,

and a few trade publications and Barron’s

gave voice to the possibility of Amazon once again coming to the market,

this time with Goldman.

But how true was all of this? Mr. Noto maintains that his

research was based solely on fundamental analysis. “My research has been based

on the assumption that Amazon’s sales growth would result in operating

improvements and perhaps profitability by fourth quarter this year,” he said.

“When sales growth slowed, we downgraded. Our analysis is research-driven, and

we respect the fact that there is a Chinese wall separating us from Goldman

Sachs’ corporate-finance activities.”

Quite understandably,

Amazon’s Mr. Grandinetti takes pains to state that all is well with the

relationship. “Morgan Stanley and Mary Meeker have been supporters of the

company for a long time,” he said. “On the banking side, we are pleased with

the work they have done for us. That said, Morgan Stanley is one of many

partners we’ve worked with, and will continue to work with, in the banking

community.”

Ms. Meeker herself acknowledges that the relationship has

had its tense moments this year. “We live in a world of sound bites,” she said

of the Barron’s incident, adding that

what she actually said was that Amazon’s numbers could be closer to $1 billion

than $500 million-and that her emphasis was on direction and growth, not the

absolute number. “Russ was upset; his phone lit up. But I didn’t see it as a

fissure in the relationship,” she said. With regard to the June comments, it

seems to be a case of Ms. Meeker calling them as she saw them. But in the end,

she insisted that, like any couple that has survived good and bad times, she

and Mr. Bezos will continue to do business together.

“Look, I’ve said this before. This is a high-risk,

high-reward type of situation,” she said. “There is a 75 percent chance that

Amazon becomes the greatest retailer of our time, and 25 percent that it just

won’t work. And Morgan Stanley would not have raised over $2 billion for the

company if we didn’t think there was a better chance than not that it was a

great company.” So for the time being, the Mary and Jeff show continues. Like a

vaudeville act, perhaps, going through a bit of a rough patch.

Meanwhile, back at the conference, no one was surprised that

Mr. Bezos’ first topic for discussion was Amazon’s cash position. “One of the

most pervasive myths about Amazon is that we are running out of cash,” he said

emphatically. “That is just plain wrong. We will end this quarter with $1.1

billion in cash.”

Said one investor and large shareholder of Amazon who was in

attendance: “If Amazon was really pissed at Morgan Stanley, then why did Jeff

present at the Morgan Stanley conference? I myself would be very disappointed

if Amazon was basing its investment-banking decisions on the research that it

gets.”