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You'll Never Do Research in This Town Again July 31, 2005
WALL STREET analysts have taken a lot of heat in recent years from regulators and this columnist for being incessantly, unjustifiably upbeat about the companies they follow. Cheerleading from the sidelines was, of course, a proven way to generate investment banking revenue for analysts' firms. Incompetence also played a role in many reports, where a corporate outlook was always rosy.
But last week, it became clear that there may be another explanation for analysts' unreasoned optimism: fear of retaliation from the companies they follow.
Last Tuesday, in a highly unusual move, Tad LaFountain, a veteran semiconductor stock analyst at Wells Fargo Securities, said he was dropping coverage of the Altera Corporation because its management had stopped talking to him and would not let him ask questions during conference calls. ................
After Mr. LaFountain went public with his tale of retaliation by Altera, Nathan M. Sarkisian, the company's chief financial officer, publicly apologized to him and said the company would no longer ice out any analysts.
What Altera did not say was that it had also blacklisted Chris Danely at J. P. Morgan Securities. A seven-page letter dated April 22 from Mr. Sarkisian began succinctly: "Be advised that we do not intend further interaction or communication with you or your staff." Mr. Danely's transgression? Bias against the company, according to the letter.
Mr. Danely, through a spokesman, declined to comment. Altera's spokeswoman, Anna del Rosario, said that all Wall Street analysts would be given full access to company management. She declined to comment on Mr. Danely's past relationship with the company.
Altera is not the only company to punish analysts who have the temerity to call 'em as they see 'em. But few analysts publicize such actions, probably because their don't-rock-the-boat bosses are too gutless to allow it.
Shame on them. The more sunlight that is cast on this behavior, the faster it may stop.
Of course, thinking people may wonder why executives with complex company operations to oversee would bother to blackball analysts with whom they disagree. Such behavior could also be viewed as a darn good sign that a company has something to hide.
Sean P. McGowan, a veteran toy industry analyst at Harris Nesbitt, a unit of the BMO Financial Group in New York, says that many companies have shut him out over the years. "Most of them are no longer with us," he said. Gone perhaps, but not forgotten.
"If I'm wrong, I'm the one who's going to look bad and I'm mature enough to admit it and change my opinion," Mr. McGowan added. "If I'm right and results do suffer, shutting me up will not in any way reduce the impact."
WEIRD that some executives just can't grasp this simple truth.
Consider a recent dust-up between Douglas P. Smith, the chief financial officer at the Mercury Interactive Corporation, a software maker in Mountain View, Calif., and Katherine R. Egbert, an analyst at Jefferies & Company in San Francisco.
On May 25, Ms. Egbert published a report noting that with five weeks to go in Mercury Interactive's second quarter, customer orders were looking weak. In her report, Ms. Egbert reiterated her hold, or neutral, rating on Mercury shares. She sent the report to Mr. Smith. His e-mail response, which was provided to The New York Times by an executive at another Silicon Valley company, opened with an expletive.
It continued: "Why don't I just call you up and get my weekly forecast update. This is just so over the top in terms of National Enquirer journalism. Not to mention being filled with numerous factual errors and misrepresentations. Since you seem to believe that you have a reliable and trustworthy 'mole' inside of Mercury, then I see no reason for you to have any other relations with the rest of our company. You are so done with us. See ya, Doug Smith."
But Mr. Smith was not finished. "BTW," he added, "if I can figure out how Mercury can enjoin you from publishing research on our company, then, by god, I will. You [sic] behavior is unprofessional and contemptible, regardless. Stay tuned."
Talk about pots and kettles.
Dave Peterson, a Mercury Interactive spokesman, said that the company provides access to all of the 30 to 40 financial analysts covering it "during the regular communications process and according to Reg FD requirements." (Regulation Fair Disclosure was instituted by the Securities and Exchange Commission five years ago to prohibit selective disclosure of material nonpublic information by companies.) He said that after Thursday's earnings call, Mercury Interactive officials spoke with Ms. Egbert.
As for Mr. Smith's e-mail message, Mr. Peterson said he could not comment on "specific communications with individual analysts." He said that Mr. Smith would not agree to an interview.
Ms. Egbert also declined to be interviewed or to comment on the e-mail message from Mr. Smith. She may have felt exonerated, however, by Mercury Interactive's second-quarter results, which the company reported late last Thursday.
Mercury, which had reduced its outlook for the quarter in early July, just over a month after Ms. Egbert said the quarter was not looking great, said its results had been hurt by weakness in Europe and a drop in deferred revenues as customers shifted away from subscription agreements.
In a conference call with analysts, Mr. Smith also said that Mercury Interactive would probably have to restate its financial results for 2002, 2003 and 2004 because of accounting problems with past stock option grants. The S.E.C. is conducting an informal investigation into the company's option grants, and the company's directors have appointed a special committee to conduct an internal review of the matter. It is unclear how big the restatement might be.
Why, when faced with analysts who do their jobs, do some executives lash out? Who could possibly want to follow in the footsteps of Jeffrey K. Skilling, the former Enron chief executive who spat an expletive at an analyst on a conference call six months before the company collapsed? Isn't it better to be the model of professionalism when trying to persuade an analyst that he or she is wrong?
It's possible that these guys are equal-opportunity bashers, treating the analysts who follow their companies the same way they deal with everyone else around them. But another reason for this oddly aggressive behavior may be that many executives, especially in Silicon Valley, are more concerned about managing their company's stock price than managing their company.
Whatever the reason, there really is no excusing this kind of thing. C'mon guys, get a life.
You'll Never Do Research in This Town Again July 31, 2005
WALL STREET analysts have taken a lot of heat in recent years from regulators and this columnist for being incessantly, unjustifiably upbeat about the companies they follow. Cheerleading from the sidelines was, of course, a proven way to generate investment banking revenue for analysts' firms. Incompetence also played a role in many reports, where a corporate outlook was always rosy.
But last week, it became clear that there may be another explanation for analysts' unreasoned optimism: fear of retaliation from the companies they follow.
Last Tuesday, in a highly unusual move, Tad LaFountain, a veteran semiconductor stock analyst at Wells Fargo Securities, said he was dropping coverage of the Altera Corporation because its management had stopped talking to him and would not let him ask questions during conference calls. ................
After Mr. LaFountain went public with his tale of retaliation by Altera, Nathan M. Sarkisian, the company's chief financial officer, publicly apologized to him and said the company would no longer ice out any analysts.
What Altera did not say was that it had also blacklisted Chris Danely at J. P. Morgan Securities. A seven-page letter dated April 22 from Mr. Sarkisian began succinctly: "Be advised that we do not intend further interaction or communication with you or your staff." Mr. Danely's transgression? Bias against the company, according to the letter.
Mr. Danely, through a spokesman, declined to comment. Altera's spokeswoman, Anna del Rosario, said that all Wall Street analysts would be given full access to company management. She declined to comment on Mr. Danely's past relationship with the company.
Altera is not the only company to punish analysts who have the temerity to call 'em as they see 'em. But few analysts publicize such actions, probably because their don't-rock-the-boat bosses are too gutless to allow it.
Shame on them. The more sunlight that is cast on this behavior, the faster it may stop.
Of course, thinking people may wonder why executives with complex company operations to oversee would bother to blackball analysts with whom they disagree. Such behavior could also be viewed as a darn good sign that a company has something to hide.
Sean P. McGowan, a veteran toy industry analyst at Harris Nesbitt, a unit of the BMO Financial Group in New York, says that many companies have shut him out over the years. "Most of them are no longer with us," he said. Gone perhaps, but not forgotten.
"If I'm wrong, I'm the one who's going to look bad and I'm mature enough to admit it and change my opinion," Mr. McGowan added. "If I'm right and results do suffer, shutting me up will not in any way reduce the impact."
WEIRD that some executives just can't grasp this simple truth.
Consider a recent dust-up between Douglas P. Smith, the chief financial officer at the Mercury Interactive Corporation, a software maker in Mountain View, Calif., and Katherine R. Egbert, an analyst at Jefferies & Company in San Francisco.
On May 25, Ms. Egbert published a report noting that with five weeks to go in Mercury Interactive's second quarter, customer orders were looking weak. In her report, Ms. Egbert reiterated her hold, or neutral, rating on Mercury shares. She sent the report to Mr. Smith. His e-mail response, which was provided to The New York Times by an executive at another Silicon Valley company, opened with an expletive.
It continued: "Why don't I just call you up and get my weekly forecast update. This is just so over the top in terms of National Enquirer journalism. Not to mention being filled with numerous factual errors and misrepresentations. Since you seem to believe that you have a reliable and trustworthy 'mole' inside of Mercury, then I see no reason for you to have any other relations with the rest of our company. You are so done with us. See ya, Doug Smith."
But Mr. Smith was not finished. "BTW," he added, "if I can figure out how Mercury can enjoin you from publishing research on our company, then, by god, I will. You [sic] behavior is unprofessional and contemptible, regardless. Stay tuned."
Talk about pots and kettles.
Dave Peterson, a Mercury Interactive spokesman, said that the company provides access to all of the 30 to 40 financial analysts covering it "during the regular communications process and according to Reg FD requirements." (Regulation Fair Disclosure was instituted by the Securities and Exchange Commission five years ago to prohibit selective disclosure of material nonpublic information by companies.) He said that after Thursday's earnings call, Mercury Interactive officials spoke with Ms. Egbert.
As for Mr. Smith's e-mail message, Mr. Peterson said he could not comment on "specific communications with individual analysts." He said that Mr. Smith would not agree to an interview.
Ms. Egbert also declined to be interviewed or to comment on the e-mail message from Mr. Smith. She may have felt exonerated, however, by Mercury Interactive's second-quarter results, which the company reported late last Thursday.
Mercury, which had reduced its outlook for the quarter in early July, just over a month after Ms. Egbert said the quarter was not looking great, said its results had been hurt by weakness in Europe and a drop in deferred revenues as customers shifted away from subscription agreements.
In a conference call with analysts, Mr. Smith also said that Mercury Interactive would probably have to restate its financial results for 2002, 2003 and 2004 because of accounting problems with past stock option grants. The S.E.C. is conducting an informal investigation into the company's option grants, and the company's directors have appointed a special committee to conduct an internal review of the matter. It is unclear how big the restatement might be.
Why, when faced with analysts who do their jobs, do some executives lash out? Who could possibly want to follow in the footsteps of Jeffrey K. Skilling, the former Enron chief executive who spat an expletive at an analyst on a conference call six months before the company collapsed? Isn't it better to be the model of professionalism when trying to persuade an analyst that he or she is wrong?
It's possible that these guys are equal-opportunity bashers, treating the analysts who follow their companies the same way they deal with everyone else around them. But another reason for this oddly aggressive behavior may be that many executives, especially in Silicon Valley, are more concerned about managing their company's stock price than managing their company.
Whatever the reason, there really is no excusing this kind of thing. C'mon guys, get a life.
