Party Over, Top Asian Internet Analyst Reflects
Tech Headlines Friday January 19 7:50 AM ET
By Tony Munroe
HONG KONG (Reuters) - Matei Mihalca has a regret or two, but Merrill Lynch's star Asian Internet analyst does not apologize for being one of the louder bulls during the region's brief dot-com boom.
Acknowledging that he has lost sleep and sprouted white hair over the last nine months, Mihalca says nevertheless: ''fundamentally, I believe our work has been sound.''
Amid the smoldering remains of the global Internet stock craze, sell-side analysts have come in for a share of blame from critics accusing them of unbridled industry boosterism.
Mihalca cut a swath through Asia's late-blooming dot-com culture, making himself media-accessible, sprinkling humor through his research reports and forging close ties to companies -- many of which Merrill hoped to take public.
He told Reuters this week that while some investment bank researchers may be deserving of criticism -- he refuses to name names -- Merrill's team was not among them.
``Clearly, I think there were people involved in this process who were more willing to promote companies that maybe were not the best companies, or to write research that was subservient to other interests,'' he says.
In a New York Times profile nearly a year ago, Mihalca defended his close ties with companies from whom Merrill sought underwriting business: ``In many places people see this as a conflict ... I see it as working together.''
Asked by Reuters this week if he stood by the quote, Mihalca said: ``Yes I do. I see less of a conflict in research and banking working together and more of a necessity. In that process, in that cooperation, I'm guided by my integrity.''
The word ``integrity'' comes up often in conversation with the 31-year-old Mihalca, as do references to his homeland of Romania, where he was once a member of the Communist party.
Mandarin-speaking and married to a Taiwanese, Mihalca likes to talk about the Internet's encouragement of free expression in culturally conservative societies such as China and Korea.
Noting that both Merrill Lynch and regulators have checks and balances to prevent conflicts of interest and protect investors, Mihalca believes entrepreneurship should be allowed to flourish and regards ``opportunism'' as a positive concept.
WHO'S TO BLAME?
Asked if analysts should bear some responsibility for the feverish atmosphere that saw many investors lose huge amounts of money in Internet stocks, Mihalca says: ``The answer is yes.''
But he quickly adds that responsibility must be shared.
What drove the boom was ``human nature as reflected in the public at large,'' he says.
Despite a spate of ``buy'' ratings on stocks that later fell to tiny fractions of their IPO prices, ``I don't think we ever glossed over the risks or nuances,'' he says.
``It may be difficult to see this now, when we're in the midst of another black-and-white environment just as a year ago, only in the opposite direction.'' he says.
Mihalca has grown increasingly bearish in his near-term outlook. The only stock he rates a ``buy'' is South Korea's Internet Auction Co (43790.KQ), which this month sold a controlling stake to U.S. auction giant eBay Inc (NasdaqNM:EBAY - news).
MISSED CALLS?
Mihalca upgraded Indian Internet portal Satyam Infoway (NasdaqNM:SIFY - news) when the stock was at US$36, but the stock closed on Wednesday at US$6.50.
``Yes, there are some stock calls that we might have approached differently,'' he says.
In the case of Satyam, which Merrill took public, the firm's fundamentals were strong but market sentiment had eroded.
``We looked at this as a company call, whereas in fact it should have been a stock call, in which sentiment played a very important part.''
Another Mihalca report in August 1999 on Pacific Century CyberWorks (0008.HK), then trading around HK$4, was titled: ''Right company, right place, right time.''
PCCW shares reached HK$28.50 in February, allowing it to buy Hong Kong telecoms giant Cable & Wireless HKT. But the stock fell below HK$4 this week.
Mihalca says that in hindsight the call was ``sound.''
``The fact is that you have a very tricky problem on your hands, which is: how do you value companies that are intrinsically very difficult to value?,'' Mihalca says.
A Mihalca favorite that seems to have fallen out of his graces is China portal NetEase.com Inc (NasdaqNM:NTES - news), which Merrill took public last summer. Earlier this month, Merrill cut its rating on NetEase to ``accumulate'' from ``buy.''
``What William (Ding, the founder) and NetEase represented, I think, was what the Internet was all about,'' Mihalca says. Execution is another story: ``I think that's where they have not done so well over the last year.''
And Now, The Hangover
Hong Kong's Internet stock cycle, which soared and plunged over a few months in late 1999 and early 2000, now seems almost dreamlike in its fervor and brevity.
Mihalca says just a few of Asia's Nasdaq-listed pure-play dot-coms -- Sina.com (NasdaqNM:SINA - news) and Chinadotcom (NasdaqNM:CHINA - news) among them -- are likely to survive.
Merrill hasn't dropped coverage on any Net stocks yet, but Mihalca said he would do so if they continued to underperform. In future he expects to do more in-depth cover of fewer companies.
``We believe the Internet is here to stay, no matter what this current downturn looks like,'' he says.
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