I’m here at the AlwaysOn Venture Summit in Half Moon Bay. I love these
conferences because I learn so much from them. I chose the less
popular of the breakout sessions, the one with the financial analysts.
They took all the heat during the dotcom days, and now they are
required to be more independent and less a part of the pitching team
for an IPO. There is a Chinese wall now between investment bankers and
analysts, even in the same firm. Analysts aren’t even allowed to see
the road show presentation until it is being presented.
In the past, companies used to rely on sell-side analysts for advice,
and the analyst coached the company during the IPO process. Now the
relationship has truly changed, and the relationship is a little more
equal.
The role of the analyst has changed, though not completely, since the passage of SEC Reg FD in 2000..
Reg FD prohibits the selective disclosure of material information. So
analysts don’t get any "secret" information from company management,
even if they have a close relationship.
Here’s how the process works now. Bankers go pitch deals to private
companies that they think should go public. Then the research analysts
look at the potential deals during the vetting process. The analyst
gets assigned to a company, and then tries to learn everything there is
to learn about the company. He or she then recommends whether the bank
does the deal or not.
The investment bank’s brand is now very important, and before a bank
gets involved in the deal, they ask the independent analysts. The
analyst now has the flexibility to say no to a deal. Analysts also can
put neutral ratings on stocks being taken public by their own banks. In
the last decade, that almost NEVER happened.
Most analysts know the private companies in their space, and have met
with the private companies before the bankers try to pitch them.
There’s nothing wrong with putting a buy rating on a company that an
analyst thinks can make money for an investor, but it’s no longer an
automatic process.
But because of Reg FD, the companies have become so scared that they
often won’t talk to an analyst at all. One company refused to do
anything but read a press release over the phone to the analyst. You
can separate the companies with the skilled management and investor
relations teams because they don’t just let the lawyers drive the bus,
On the other hand, as an analyst in the ’90s, you could be spoon-fed
the information about the companies; now you really have to do your own
research. Fortunately, the blogosphere has put lots of information
(biased and unbiased) out there about private and public companies, and
talking to management isn’t as important. Imran Khan from JP Morgan
said that he goes to conferences and listens to CEOs who may not talk
to analysts talk on panels about their businesses and their outlooks.
By the time he has heard a hundred CEOs in a space, he has a lot of
data points on which to base an analysis of trends in a specific space.
BTW, these analysts are all pretty bullish about the market: there’s a
big IPO pipeline, and there is a market for some tech stocks. However,
the bar has been raised. The company MUST be profitable. And sometimes
even that’s not enough, because of market conditions.
