Merrill probe may not affect analysts
| • | Be wary of analyst reports |
By Tom Cahill and Emma Moody
Bloomberg News Service
NEW YORK — Leonard Teitelbaum was one reason Interstate Bakeries Corp. was happy to have Merrill Lynch & Co. help sell about $176 million of stock earlier this month.
Five days after the sale by shareholder Nestle SA, Merrill analyst Teitelbaum finished his first report on the maker of Hostess Twinkies and Wonder Bread, recommending investors buy the stock.
"We look at it as a positive any time an analyst would pick up and take a look at the company and follow us," said chief financial officer Frank Coffey.
The role Wall Street analysts play in the investment banking business is at the center of New York Attorney General Eliot Spitzer's investigation into conflicts of interest in research. Merrill's $100 million settlement with Spitzer last week will likely prompt securities firms to disclose more about such relationships than ever before.
But it won't reduce analysts' involvement in winning and retaining clients, investors said.
"I'm cynical," said Tim Leach, who oversees $135 billion as chief investment officer for Wells Fargo Private Client Services in San Francisco. "I don't think this means there's going to be some re-engineering of the industry."
As part of the agreement with Spitzer, Merrill will create a panel to review stock rating changes and appoint someone to ensure the biggest securities firm by capital lives up to the agreement for one year. The settlement stops short of barring analysts from accompanying bankers when they solicit business from potential clients.
Interstate Bakeries' experience is typical. Coffey and Nestle recognized the benefit of having a Merrill analyst explain to its 14,000-broker sales force the merits of the Kansas City, Mo.-based company.
"They were involved in getting their arms around the business so they could help their sales force have an opinion about our fundamentals and the future operations of our business," the CFO said.
Honest appraisals
Merrill says analysts such as Teitelbaum give investors an honest appraisal of companies, even when the companies are banking clients.
"We believe strongly in the integrity of our analysts," Stanley O'Neal, Merrill's president, said recently. Teitelbaum didn't return a call for comment.
Interstate Bakeries and Nestle also picked Credit Suisse First Boston, whose food analyst David Nelson initiated coverage last week with a "buy" recommendation. Nelson was ranked the No. 2 food analyst last year by money managers surveyed by Institutional Investor magazine.
The New York probe shone a light on a longstanding relationship that attracted little concern until benchmark stock indexes collapsed from their highs in March 2000, causing billions of dollars of losses in stocks that analysts had touted. Enron Corp., WorldCom Inc. and Tyco International Ltd. caused about $145 billion of investor losses in the past year.
Spitzer, who a month ago was invoking the state's Martin Act that would have allowed him to bring criminal charges against Merrill, had talked about the firm's setting up a restitution fund to pay investors who lost money, paying a fine and separating investment banking and research. Of these, only the fine survived.
"Congratulations, Mr. Spitzer," said Tom Brown, chief executive of hedge fund Second Curve Capital LLC, who was fired as an analyst at Donaldson, Lufkin & Jenrette. In 1998 because he was too critical of banking clients "You've gotten Merrill to settle, and to agree to some important changes, but you were thrown a fat, juicy pitch — and you only hit a squib single."
Throughout the negotiations, Spitzer insisted he wouldn't settle with Merrill without changing how analysts are paid, contending there is a conflict when analysts are paid to help arrange an initial public offering or other transaction.
Hiring continues
Merrill has been luring analysts even as it cut 15,000 jobs in the past 15 months amid the biggest slump in investment banking in more than a decade.
The firm last week poached Bear Stearns Cos. analyst John Inch, who covers Tyco International Inc., which is selling shares in its CIT finance unit. Merrill in March hired Carol Warner Wilke, last year's top-ranked analyst for household products and the Merrill-Spitzer pact won't change analysts' role in banking cosmetics, from Credit Suisse First Boston.
Merrill, which netted fees of more than $2 million from the Interstate Bakeries sale, isn't alone in using research to aid banking.
"Research does a lot of really good things for investment banking," said Robert Steel, a vice chairman at Goldman Sachs Group Inc. who helps oversee equities, fixed-income, currency and commodities. "Sometimes we get the initial public offering because analysts get to the company first, sometimes we turn business down because analysts tell us it's not a good company."
