Word: analysts
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...huge profit centers for brokerage firms, which in addition to garnering lucrative advisory fees made 20 times as much in commissions on IPOs as they did on simple stock trades. Companies choosing which brokerage firm would handle their new stock issues increasingly went with those that had a star analyst willing to recommend their stock...
Merrill has said it is critical that any analyst practices forced on it be applied Streetwide to keep the firm from being at a competitive disadvantage, underscoring the pivotal role of analysts in the prevailing business model for investment banking. A recognizable analyst is often what distinguishes one underwriter from another. But even if underwriters were told they could not use analysts to win deals, they would still pull in plenty of business, says Samuel Hayes, professor of investment banking at Harvard University. Someone has to do the deals, he notes, and the large firms still have the critical sales...
...Street also dreads a lengthy process to resolve the analyst flap, which, layered on top of the accounting concerns springing from the Enron scandal, is driving investors away. To help regain their confidence, brokerage firms are making a show of efforts to reform. Last week UBS Warburg initiated its coverage of JetBlue Airways--a firm whose IPO it co-managed last month--by advising investors to "reduce" their holdings. It was apparently a pre-emptive move, to show regulators that UBS Warburg is indeed capable of using the word sell...
That hasn't been the case for a decade. As early as 1991, analysts at Furman Selz (now part of ING) recall having to pass muster with investment bankers during job interviews. Bankers, who held veto power over analyst hires, pressed applicants on their willingness to work with bankers. "You had to be willing to compromise, or you were out," says a former Furman Selz employee. By 1996 analysts at some large firms were going on new-business pitches with investment bankers, crossing the line dividing salespeople and bankers, which had been sacrosanct. By then star analysts were getting...
...memo, Merrill's Blodget outlined a weekly schedule that had him spending 85% of his time on banking and 15% on stock research. Many analysts had investment-banking bonuses written into their contracts. In an interview with FORTUNE last year, Mary Meeker, the analyst at Morgan Stanley who was dubbed "queen of the Net" for her connections in Silicon Valley, spoke freely of her interest in IPOs and investment banking. A 1999 Wall Street Journal article reported that star technology banker Frank Quattrone at Credit Suisse First Boston enjoyed "unusual autonomy," which included tech analysts' reporting directly to him. CSFB...