<font color=green>The Analyst Who Cried Buy</font>
Tuesday, April 17 10:30 PM SGT
With Internet stocks now at their most depleted levels, one may ask why many analysts re-iterated 'buy' recommendations at nearly every step of the technology capital market demise? Do stock recommendations even mean anything under these uncertain market conditions?
Perhaps benefiting the most from the technology boom and bust, investment banks the world over must now come under close scrutiny for their part in the 'Internet revolution'. The two aspects that played the most significant role in the boom times were equities research and underwriting - with the former being used to sell the later in many cases.
Underwriting is the process of taking a company public. In return for ensuring that all the shares get sold, the underwriters usually take a fee of 4-6% of the amount raised and a string of warrants that can be cashed in if the share price hits the ground running.
In the frenzy of 1999 and early 2000, the irony was that soon to be public companies were paying investment banks many millions to have access to their investors yet the investment bank's clients were beating down the door to invest in 'sure bet IPOs'. The enviable situation of being the middle man in all of this however, carries with it a mountain of responsibility.
One assumption is that companies going public will be of a certain calibre. The underwriting rule of thumb used to be 'three quarters of profitability', however that quickly changed as the insatiable demand for Internet stocks became apparent. It's hard to place the blame entirely on underwriters however, with investors often demanding new issues. On the other hand, it's always hard to say no to easy money, and the investment banks should wear the detioration of the longer term relationship as an inevitable consequence of their short term greed.
Perhaps the most sour of tastes left in investor's mouths, was that of analyst recommendations. Many analysts maintained buy ratings right to the bitter end. MarchFirst (the Internet consulting and services company) for instance is now in Chapter 11 Bankruptcy. That didn't stop Credit Suisse First Boston from issuing a buy recommendation on the stock on the 22nd of January of this year. Not to mention that strong buy recommendation that it issued last June when the share price was $26.19 - nice one guys.
Another example is Piper Jaffray & co who issued a strong buy on Looksmart when the shares were trading at $41.69. Determined to live and die by its decision, it then issued a buy recommendation on January 26 when the stock was trading at $3.41. Facing an uphill battle to achieve those sort of price targets, Looksmart is currently trading at $1.00.
In many ways worse than grossly failing to predict stock movements is the coupling of equities research with the underwriting division in a bid to win business. In some cases, opinions and recommendations from the equities analysts are noticeably tied to the fact that the company is a client of that particular investment bank. This clearly brings into doubt the integrity of the information.
The challenge for equities research will be to regain the trust and confidence of its readership in order for it to play a larger role in the investment decision.
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