(Decemebr 17) – “SEC Chairman Arthur Levitt and this newspaper find ourselves singing from the same hymnal on the subject of selective disclosure of company information to Wall Street. The Journal even struck a blow for freedom last week by refusing to do our corporate song and dance for a DLJ analyst conference that was closed to reporters.
“Now, this week, Mr. Levitt has come out with rules reminding companies of both the need and opportunity to share information widely. With the Internet, it’s just too easy and cheap not to make simultaneous disclosure to everybody everywhere. There’s no longer any excuse for giving an advantage to pros just because they work for Wall Street firms.
Like middlemen everywhere, the analysts hate to see technology eroding their privileged role. But their claim to be necessary “proxies” for the investing public is paternalistic and, in light of recent practices, a joke.
“When Web companies openly admit they gave their IPO business to Morgan Stanley hoping to get a favorable tout from Mary Meeker, you have to wonder whom the analysts are really working for. Donald Trump, for one, has made no secret of his claim that he was approached by one Wall Street firm offering a favorable opinion on his casino business in exchange for advisory work.
“The news last week, moreover, wasn’t that Jack Grubman, Salomon’s top-rated telecom analyst, had become a believer in AT&T’s cable strategy. The news was that his change of heart came just as Salomon was pitching for work as an underwriter of AT&T’s wireless tracking stock. Mr. Grubman may indeed be a fine analyst. All the more reason he should be asking how his reputation became hostage to such widespread suspicion.
“There is no question that standards have been slipping, and it’s going to end badly sooner or later. How many Internet companies have seen their shares open at five or six times the listing price? They put on a grin and claim to be pleased, but the real money is not going to them. It’s going to the underwriters’ favored cronies. When VA Linux came out last week, it soared 700% on the first day. The IPO netted a mere $132 million for the company, while a simple calculation shows that $1.2 billion fell into the pockets of somebody somehow selected by the underwriters.
“The so-called “analysts” labor mightily to justify such valuations, though we all know many investors who paid for this stuff will come to grief. The only reliably skeptical voice has been the press, saying no more than what you would expect from any clear-headed person whose bread wasn’t being buttered by fly-away prices for companies with no earnings and no clear prospect of earnings.
“We’re glad to do our part here, but the bigger rebellion still must come from ordinary shareholders themselves. Surely they’re running out of patience with CEOs who share critical information with analysts in plush surroundings before making it available to their own investors. More than half of companies already let individual investors listen in on conference calls with analysts, up from 30% last year. And while we don’t necessarily endorse their investing style, day traders at least have fully recognized that the market is not some divine mystery accessible only through Wall Street’s tenured priesthood. As Warren Buffett has eloquently written, the existing establishment of analysts and brokers serves mainly as a tax on investment returns.
“Some analysts, of course, are useful people, adding to the fund of knowledge–though increasingly these are fund managers and gadflies who work somewhere besides the blue-chip banks. Other analysts are simply overpaid suits and skirts who recompile the numbers companies dish out and scratch a few words restating the obvious. Naturally, members of this latter guild are unhappy about being put on a level playing field with a company’s own shareholders. But the historic moment calls for making information widely available, not for controlling access to it. Any business model built on the opposite conceit can’t be long for this world.