[Red Herring] Sell-side explosion

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From: Linda (joelinda1@home.com)
Date: Thu Sep 14 2000 - 13:48:48 PDT

[One of the few articles I've read on lack of objectivity of sell-side
analysts. This is why analyst reports are often of little help to small
investors; probably would be better to play contrarian to their ratings.



PERSONAL CAPITAL: Sell-side explosion
By R. Scott Raynovich
Redherring.com, September 14, 2000

The Internet has provided great content and tools for the
individual investor: lower commissions, wider availability
of company information (including conference call Webcasts),
research tools such as Edgar Online, and a plethora of
investment content, including news and discussions.

So, what hasn't been so good? The inability of the media and
public at large to differentiate news from sell-side
research. It's not that sell-side research is inherently bad
-- it's the context in which it's presented and the amount
of disclosure provided to the investor that determines its
worth. And at times, Yahoo, CNBC, the investment banks, and
the regular news outlets appear to present sell-side
research as the gospel truth. Upgrade! Strong Buy! Double
upgrades! You've hit the jackpot!

There's a reason sell-side analysts are on the sell side.
Their main purpose -- in the grand scheme of the investment
banking food chain -- is to sell stock. And even if an
analyst of the utmost integrity and knowledge is doing their
best to provide the investor with objective information,
they inevitably fall under the pressure of their investment
banking parents. Investment banks exist to take companies
public and sell stock, which makes it virtually impossible
for any sell-side analyst to say anything truly bad about
companies being underwritten by the bank.

I think this has become especially dangerous in cases in
which an analyst -- or a reader of sell-side research --
assumes objectivity on a matter in which the research is
undoubtedly biased. Money corrupts, absolutely. And unless
you are a saint, there is no way you can detach yourself
from the influence of large sums of money flowing through
the banking system.

Let's take, for example, the matter of Paul Johnson, the
well-respected managing director of research at Robertson
Stephens who has followed the networking industry for years.
He owns 100,000 shares of ONI Systems (Nasdaq: ONIS), worth
about $8.6 million based on current market prices, as a
result of an investment he made in the company before it
went public. Now, he covers the stock as a sell-side
research analyst, and he believes that he can continue to
cover the company objectively. This notion is, quite simply,
absurd. Light Reading senior editor Marguerite Reardon
interviewed Mr. Johnson on the matter, asking if he thought
he could continue to cover the company in an objective

Mr. Johnson responded by asking, "What can I do?"

Well, first of all, he could assign another analyst to cover
ONI Systems.

Let's say we granted analysts the leeway to make large pre-
IPO investments in companies they later cover as research
analysts in the public markets (and apparently the SEC does
grant them such leeway). It seems to me that a lot of VCs
are missing a grand opportunity -- they should all sign up
for jobs as sell-side research analysts so that they can
have dual roles. That way, they would be able to write
glowing research reports on the companies in their
portfolios once they have gone public. What's wrong with
this picture?

Mr. Johnson said he was "just putting food on the table."
The first question is, what exactly does Mr. Johnson eat?
After that, the investor should ask Mr. Johnson what his
career path is -- is he a VC or a sell-side analyst? And
isn't there an inherent conflict in trying to take both
roles for the same company?

I've spoken to many analysts about such scenarios, and their
answers are always the same: "There's disclosure" or "It's

Such responses fall short. What on earth does legality have
to do with it? Have we so many lawyers in the world that
we've forgotten about common sense?

In many cases, of course, the analysts are doing their jobs
-- and good jobs at that. But disclosure has been limited to
fine-print legalese at the bottom of reports, and it is the
responsibility of news organizations and individual
investors to put sell-side research in its proper context.
Let's all stay skeptical.

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