New York – Our article earlier this week titled The Research Diaspora analyzed the recent developments in equity research, focusing on the specific case of Bear Stearn’s equity research department and its acquisition by JP Morgan. The past 72 hours have brought events in the banking sector that merit extending that analysis to other first-tier research departments and their impact in the overall research space.
The financial news this week indicate that some of the most respected equity research departments (i.e. Lehman and Merrill) will suffer profound changes after acquisitions by other investment institutions. Up to last week, Lehman employed more than 800 analysts and Merrill counted on approximately 600 analysts, according to their websites. With the partial purchases of these firms by Barclays and Bank of America, dozens of analysts moving in the street will change the current scenario in the equity research world. Even in the unlikely case that the new parent companies retained all of the analysts from the acquired companies, the research space is facing a shake up.
Responding to our article The Research Diaspora, a senior research manager who worked for Bear Stearns before its collapse, pointed out that approximately one third of Bear’s senior analysts were retained by JP Morgan. Bear was ranked as the second best equity research department in the US, which might have been an incentive for JP Morgan to retain analysts (although it might have been a disincentive given the higher cost of retaining these analysts).For the sake of analysis, let’s suppose that the other two new parent companies (Barclays and Bank of America), retain a similar percentage of research analysts from the acquired firms. This means that about 530 analysts from Lehman, and 400 from Merrill will be looking for jobs.
Analysts let go by the new parent companies can choose different ways to occupy their free time, including sailing the Caribbean. But for those interested in remaining in the research world, three options seem like rational choices, as we saw with the Bear case: find a job in another investment banks; switch to buy-side research; or create their own independent research shop.
Notwithstanding the overpopulation of sell-side research, the fact that fewer sell-side powerhouses are producing equity research might increase the value of the research of those firms that survive the crunch. Investors will also have access to a larger quantity of independent research if some of the let go analysts find the motivation to start their own research business.
Regarding quality, the Bear case showed us that some of the better analysts were not welcomed by JP Morgan. The cost of retaining them far exceeded the bank’s willingness to retain quality. Sell-side firms not involved in acquiring collapsed firms are likely to receive top ranked analysts. The same goes for buy-side and for independent research providers.
The research space is being influenced by the crunch. The number and the quality of analyst changing posts in the street is on the rise. The research space might benefit from the current situation since surviving banks, the buy-side and independent research are receiving significant quantity and quality of analysts that fell through the cracks of the crunch.