Merrill's roll in the INSP/GNET "merger"...
The Wall Street Journal article below was posted on another SI board, on 6/13/01. It gives a detailed review of when Merrill Lynch got involved with GNET, and what roll they played in the merger with INSP. The article says they were paid between $10-$16 million CASH for being GNET's financial advisor for the merger, "after the deal closed." Not a bad gig, huh? Heck...I would have done it for about half that amount. And in hindsight, the advice I would have given would take only a single telephone call and a couple dozen words to GNET's management..."MERGE WITH INFOSPACE? WHAT THE HELL YOU BEEN SMOKING? IT'LL BE A PENNY STOCK IN LESS THAN A YEAR. EVEN BLODGET THINKS IT'S A PIECE OF CRAP. AREN'T YOU ON HIS PRIVATE E-MAIL LIST?" Less than one month after the "merger" was announced on July 26, 2000 and both stocks rapidly began to tank, this poster had it absolutely right (#reply-14257294) and I had it absolutely wrong. In fact, I've pretty much felt like a complete dumbsh*t as an investor ever since.
BTW, if you go back an retrieve your "Joint Proxy Statement" (the "proposed" merger was announced on July 26, 2000...just under 21 months ago) mailed to all shareholders of INSP and GNET regarding the proposed "merger" (although I've long since used mine up in the kitty litter box, and in the bottom of the bird cage), you'll remember that it was 152 pages long, but it also had another 128 pages of "Financial Statements." On the VERY LAST TWO PAGES (pgs. 279-280) is a letter from Merrill Lynch to the GNET Board of Directors. Within that letter is the following statement,
In preparing our opinion, we have relied on the accuracy and completeness of all information supplied or otherwise made available to us by the Company (GNET) and Parent (INSP), and we have not independently verified such information or undertaken an independent appraisal of the assets of the Company or the Parent. With respect to the financial forecasts furnished by the Company and the Parent, we have assumed that they have been reasonably prepared and reflect the best currently available estimates and judgment of the Company's or Parent's management as to the expected future financial performance of the Company or the Parent, as the case may be.
Yep, not a bad gig. For $10-$16 million, they don't even give you an "independent verification" of even "verify the information" provided by the companies that they've been hired by, as one of the "financial advisors" for a merger. Just amazing!
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Message 15938748
(*NOTE: Most of the INSP/GNET merger stuff is in the last paragraphs of the article below)
June 13, 2001
Research Analysts Feel Increasing Heat
Over Their Ratings, Conflict of Interest
By Charles Gasparino
Staff Reporter of The Wall Street Journal
A week ago Wednesday, Credit Suisse First Boston was appointed lead underwriter on a new-stock deal for GoTo.com, a Pasadena, Calif., Internet search engine. CSFB beat out Merrill Lynch & Co. for the lucrative position.
A few hours later, Merrill's high-profile technology-stock analyst Henry Blodget, who had been bullish on GoTo.com shares, did a turnabout on the stock. He downgraded the stock to a "neutral" from "accumulate."
A coincidence?
Merrill says it is. Mr. Blodget had no idea his own firm had pitched its investment-banking expertise to GoTo.com (www.goto.com ) when he issued his latest report and recommendation, Merrill says.
Merrill, which declined to make Mr. Blodget available for comment, says the analyst issued the report because GoTo.com's stock price had soared. "The notion that we would retaliate against a company for not selecting us is offensive and wrong," the company said in a statement. GoTo.com declined to comment.
In any event, the timing of Mr. Blodget's report couldn't have been worse. Wall Street research analysts have been badly discredited in the wake of the Nasdaq Composite Index's general collapse over the past year. These analysts, who traditionally act as a filter between the stock market and investors, long have been assailed for a lack of independence.
Now, however, investors increasingly are blaming analysts for helping to pump up the dot-com bubble by issuing favorable research reports in recent years on companies handing out fat investment-banking fees -- and not warning investors of the problems at these companies until long after the bubble burst.
The issue will come to a head this week. Thursday, a congressional subcommittee holds hearings to analyze conflicts of interest at Wall Street research departments.
In a nutshell, the major clash is this: Securities firms routinely publish research advising investors which stocks to buy and sell. At the same time, they fiercely compete for assignments to sell new stock issues for corporate clients. And negative comments from their own analysts don't help.
So the subcommittee's chairman, Rep. Richard Baker, a Republican from Louisiana, says the hearings will raise a simple question: Are small investors getting unbiased research from Wall Street?
"Over the past five years, there have been enormous capital inflows from working families" into the stock market, Mr. Baker says. Research reports "have become marketing brochures" for firms looking to win investment-banking assignments, he says, making it difficult for average investors to determine if a "hold" recommendation means they should sell a stock, or if an "accumulate" means they should buy.
Mr. Baker says he would like to increase disclosure of such conflicts, rather than making wholesale changes in the stock-underwriting process. He says his staff had ideas of calling Mr. Blodget -- along with Morgan Stanley 's top Internet-stock analyst, Mary Meeker -- to testify, but were told by people at the firms that the analysts wouldn't be available. (A Morgan Stanley spokesman said the firm received no official request, and a Merrill spokesman said the same.)
Meantime, Wall Street is scrambling to react to the tempest. Merrill is considering a rule that would require analysts to disclose if they own a stock when they publish a report or recommendation, people at the firm say. Credit Suisse First Boston, a unit of Credit Suisse Group , recently told about 50 analysts they no longer partly report to star technology-company banker Frank Quattrone, but instead report only to the firm's research chief. And Tuesday, the Securities Industry Association, Wall Street's main trade group, issued a series of "best practices" for analysts.
Though analysts are supposed to provide independent evaluations, many are paid partly on the investment-banking business they generate. For its part, Merrill says analysts' paychecks aren't "directly" related to investment-banking deals. Merrill does say its analysts receive a large portion of their paychecks -- in the form of year-end bonuses -- from a pool of money derived from banking deals and other businesses, and an employee's contribution to that pool is reflected in his or her bonus.
Mr. Blodget, who last year received a pay package exceeding $5 million, certainly was a major contributor to Merrill's bottom line. The top-ranked analyst was a regular on television business news reports for his opinions on various tech stocks. (Because of an arbitration suit, Merrill no longer allows Mr. Blodget to appear on TV.)
The company concedes that its investment bankers working on the GoTo.com deal used Mr. Blodget's past bullishness on the company as a selling point. It wasn't the first time Mr. Blodget played a role in his firm's investment-banking efforts. Last summer, as the tech sector was tanking, Mr. Blodget remained a bull on some stocks, including InfoSpace Inc., a once-highflying technology stock.
Around this time, InfoSpace (www.infospace.com ) was in talks to acquire another Internet company, Go2Net Inc. (no relation to GoTo.com). On July 10, Merrill approached the management of Go2Net (www.go2net.com ) to serve as an adviser on the deal, in which Go2Net management would receive InfoSpace stock as payment for selling the company, according to an InfoSpace regulatory filing.
One of Merrill's selling points was Mr. Blodget's bullishness on InfoSpace. InfoSpace shares were trading at around $55, but Mr. Blodget believed they were undervalued. His share-price target: $100. Since executives at Go2Net would receive stock as payment, Mr. Blodget's bullishness on InfoSpace would serve the company well, Merrill's bankers asserted.
On July 11, one day after Merrill's meeting with InfoSpace, Mr. Blodget reiterated his buy recommendation on the stock in a research report. The reason for the report? A "company update," according to the report.
In any event, on July 17, Go2Net retained Merrill as financial adviser, agreeing to pay $10 million to $16 million, "payable in cash" after the deal closed, according to an internal Merrill document.
On July 18, Merrill made a presentation to Go2Net's board, Merrill documents show. The company, code-named "Gekko," received an overview of the transaction, an assessment of the merger and an overview of InfoSpace, code-named "Iguana," according to Merrill documents. Part of that assessment, the documents show, involved Mr. Blodget's bullishness on InfoSpace stock.
Some critics question the timing of Mr. Blodget's report. Merrill had a major incentive to show top executives at Go2Net that it would support InfoSpace stock -- and their new investment -- in the months and years ahead, asserts Jacob Zamansky, a New York lawyer who filed an arbitration case on behalf of a client in the InfoSpace matter. The pending case, filed with the New York Stock Exchange, contends that a 46-year-old pediatrician lost more than $500,000 because he bought shares of InfoSpace Inc. based on Mr. Blodget's "buy" recommendations.
Merrill officials say they did nothing wrong. They say Mr. Blodget didn't know the company was negotiating with Go2Net until July 21, four days after Merrill was retained as adviser (the deal was reached on July 26). Moreover, Merrill says, it had "no motivation" to pump up the stock during the talks because its client, Go2Net, would then receive fewer shares if the price of InfoSpace rose.
Write to Charles Gasparino at charles.gasparino@wsj.com |
