March 6, 2000
Analysts of the Securities Industry Find
Rivals Can Be Stingy in Providing Data
By CHARLES GASPARINO
Staff Reporter of THE WALL STREET JOURNAL
It isn't easy to get the whole story when your sources clam up on you.
Just ask Judah Kraushaar. The Merrill Lynch & Co. analyst hoped to initiate coverage of Charles Schwab Corp., which just happened to be Merrill's archrival in the growing world of online investing. So he thought he would round up the usual information on Schwab.
Access denied!
Schwab, in an unusual action, refused Mr. Kraushaar's request for information and contact with top company officials, according to people close to the matter.
A Schwab spokesman declines to comment. Says a Merrill spokesman: "In the long run, companies and the investing public almost always benefit from the widest possible research coverage."
Exchange of Verbal Gibes
The matter comes after months of verbal gibes exchanged by the financial-service giants, as Merrill invades Schwab's turf by offering its own low-cost online trading system.
But, on a broader level, the predicament sheds light on the particular difficulties faced by securities analysts who provide research and stock recommendations on their competitors. Unlike analysts who cover other industries, securities-industry analysts often are regarded as interlopers by the companies they cover. Research reports, some say, aren't always complete, and top officials avoid their calls.
"They are the only group of analysts who have the problem that even though the securities firms need to keep shareholders informed, they really don't want to disclose certain information to a competitor," said Doug Pratt, a hedge-fund manager who specializes in financial stocks.
Is this an overreaction? Even some analysts say that securities firms have good reason to keep some distance between themselves and the analyst community. "The irony is that they are spies," asserts Tom Brown, a veteran securities-industry analyst who now runs his own research and money-management firm.
Opening Up Their Books
By some accounts, Wall Street firms grudgingly have begun to open their books to the analyst community, mostly in the hopes that positive coverage will help boost their stock price. "Most firms are focused on getting their story out," says Guy Moszkowski, a securities-industry analyst for Citigroup Inc.'s Salomon Smith Barney unit.
For some analysts, there is a certain cachet to providing research on the competition. Wall Street analyst Joan Solotar says that people inside her firm, Donaldson, Lufkin & Jenrette Securities Inc., rely on her as a "source of knowledge" regarding the securities industry. DLJ management, for instance, will ask her how the firm's approach in, say, the European mergers business, compares with that of Goldman.
"It's not that I'm having a meeting at Merrill and then tell DLJ management what they said, but you can give an early read about what's happening because you're plugged in."
But Ms. Solotar says the job does have its drawbacks. "It's not easy to pound the table about Goldman when there's a senior manager in the room," she adds. (Ms. Solotar has a "buy" recommendation on Goldman stock.)
Strains Aren't New
Strains between securities firms over research aren't new. In the 1980s when he covered Salomon Brothers, Mr. Brown recalls, he asked then-Salomon Chairman John Gutfreund during a conference about the firm's highflying mortgage-bond unit. The department then was headed by Lewis Ranieri, who pioneered the development of the mortgage-backed markets.
Before answering, Mr. Gutfreund asked Mr. Brown where he worked. "Smith Barney," he replied. Mr. Gutfreund then turned to Mr. Ranieri and ordered him to give "the short answer," which is understood on Wall Street as meaning not to provide a detailed explanation to a competitor.
Mr. Brown later culled data on Salomon's mortgage unit, first from his own traders, then from Salomon sources, particularly that firm's own loose-lipped bond traders. Mr. Gutfreund said he couldn't recall the incident.
A trader once helped Mr. Brown gauge whether the former CS First Boston would meet quarterly earnings expectations by telling him every time the firm sent an internal memo telling department chiefs to pay expenses early, rather than push them to the next quarter. "I always knew it would be a good quarter because senior management would put out the word to send in expenditures as soon as you can," Mr. Brown says. When the firm was foundering, he adds, they would "push out expenses."
Sensitivity Becomes More Acute
But the sensitivity has become more acute now because several of the largest securities firms, such as Morgan Stanley (now Morgan Stanley Dean Witter & Co.) and Bear Stearns Cos., became public companies in the 1980s, while the traditionally secretive Goldman Sachs Group Inc. went public only last May. The result: Wall Street firms are less experienced with telling their stories to the analyst community than other companies.
Bear Stearns is a case in point. Until recently, the big trading firm shied away from giving analysts access to its lucrative securities-clearing unit, even though the operation ranks as one of the most profitable in the securities industry. Part of the problem may have been that the department was the focus of a recent regulatory case. But Mr. Moszkowski says Bear has recently begun to open up its clearing unit, hoping to jazz up its stock. It doesn't hurt that the firm has settled the case with regulators (Bear Stearns to Pay $38.5 Million to Settle Securities-Fraud Charges, Aug. 6, 1999).
Analysts say Morgan Stanley Dean Witter also is closely guarded in offering access to top officials. In October, the securities firm held a conference so that analysts could hear about the firm's success from some senior executives. The only catch: Morgan didn't invite any securities-industry analysts to the event.
'Buy Side' Analysts Only
Instead, only "buy side" analysts, those researchers who assess stocks for Morgan's investment-fund clients, were asked to attend, causing complaints among securities analysts who cover the firm.
Mr. Moszkowski recalls that a buy-side analyst called him, "looking forward to the Morgan Stanley meeting. I said: 'What meeting?' "
Some analysts suggest Morgan Stanley didn't want to provide such detailed information that could be used by competitors. A Morgan spokesman says the company gives access to all analysts, and doesn't favor one group over another.
Meanwhile, such securities-industry analysts face other unusual pressures. Some say they get calls from clients looking for dirt about the analysts' own companies, which puts the analysts in an uncomfortable position. They don't want to insult a client, but they also don't want to disclose proprietary data about their employers.
One Analyst's Task
Mr. Kraushaar, for his part, is facing perhaps a more difficult task: how to persuade an archrival to give him access amid all the mudslinging. One problem could be Mr. Kraushaar's unproven record; he is a relative newcomer to the brokerage industry after spending years as a top-rated banking analyst.
In the two years since he began looking at brokerage stocks, Mr. Kraushaar hasn't developed a large following among institutional investors. And he can be disarmingly blunt. Last year, for instance, he said in an interview: "I used to say disclosure was terrible at the banks. Now I say, 'Gee, the banks were terrific.' "
It isn't the first time a Merrill analyst has considered covering Schwab. What pushed Mr. Kraushaar to move now is Schwab's recently announced purchase of U.S. Trust Corp., people with knowledge of his actions say.
Meantime, Mr. Kraushaar hasn't given up all hope of covering Schwab. If he can't persuade Schwab to reconsider, he has left open the possibility of initiating coverage without any help from the company.
Write to Charles Gasparino at charles.gasparino@wsj.com |
