New York – We predicted consolidation in equity research, but this is not what we had in mind. Three of the top ranked equity research departments are now history, and analysts are scrambling to find empty seats in an increasingly desperate version of musical chairs. While painful for the individuals involved, the reduction in capacity will help the economics of the surviving equity research departments. Will it also improve the overall health of equity research? Not sure.
There is a glut of fundamental equity research, reflecting the dysfunctional pricing mechanisms of bundled commissions. Bundled commissions are over-subsidizing equity research, with too many analysts chasing too few large cap stocks. We had forecasted that declining commission payments during the next bear market (like now, for example) would trigger consolidation in the market. However, we envisioned a Darwinian resolution, with stronger equity research departments prevailing, and firms with weaker commitments exiting equity research. This isn’t the way it is playing out. Instead, the highest ranked equity research departments get nuked and the weaker equity research departments get stronger.
Let’s look at what happened with Bear Stearn’s equity research department. Bear Stearns issued what was its last equity research report on May 30th. At that point it was the #2 ranked equity research department in the U.S. with 165 analysts, of whom 38 were ranked in the 2007 Institutional Investor All-American Equity Research survey. Industry sources indicated that only one in five Bear Stearns senior research analysts were offered similar positions at JP Morgan. Many questioned the logic behind the offers which were extended because many ranked analysts were not offered positions.
Over the last 3 months, many former Bear Stearns analysts have found new jobs, but most remain ‘on the beach’, which does not bode well for their counterparts at Lehman and Merrill. We are aware of twenty-six that have landed at new venues (see table below). That leaves close to one hundred Bear analysts unaccounted for. The analysts that go to the buy-side typically don’t get press releases, so they are harder to track. However, in the current environment, it is difficult to imagine 100 analysts being hired at hedge funds and mutual funds over the last three months. We assume most are still looking.
Of the twenty-six we know about, a little over half (fourteen) went to bulge or bulge wannabes: Credit Suisse, Deutsche Bank, Bank of America and Jefferies Group. Unfortunately for Merrill analysts, nine of the fourteen went to Bank of America. Maybe the policy will be last-in-first-out, but more likely nine chairs are now unavailable for Merrill analysts.
|
Analyst Name |
Sector Coverage |
New Firm |
|
Anthony Rizzuto |
Metals |
Dahlman Rose & Co. |
|
Daniel Whalen |
Metals |
Dahlman Rose & Co. |
|
Anthony Young |
Metals |
Dahlman Rose & Co. |
|
R. Scott Graham |
Industrial Manufacturing |
Ladenburg Thalmann |
|
Spencer Wang |
Media Analyst |
Credit Suisse |
|
Frederick Wise |
Medical Devices |
Leerink Swann |
|
Jason Gurda |
Healthcare Facilities |
Leerink Swann |
|
Danielle Antalffy |
Healthcare |
Leerink Swann |
|
Miroslava Minkova |
Healthcare |
Leerink Swann |
|
Mark Schoenebaum |
Biotechnology |
Deutsche Bank |
|
Robyn Karnauskas |
Biotechnology |
Deutsche Bank |
|
Raj Denhoy |
Healthcare |
Thomas Weisel |
|
Mark Brown |
Oilfield Services |
Pritchard Capital Partners |
|
Nick Bell |
European Media |
Jefferies Group |
|
James Shuck |
Insurance |
Jefferies Group |
|
Joseph Buckley |
Restaurants |
Bank of America |
|
Robert Hopkins |
Medical Devices |
Bank of America |
|
James Kissane |
Information Technology |
Bank of America |
|
Suzanne Schiavelli |
Specialty Finance |
Bank of America |
|
Kuni Chen |
Metal & Mining |
Bank of America |
|
Kevin Fischbeck |
Healthcare Facilities |
Bank of America |
|
Bryan Kraft |
Cable Media & Entertainment |
Bank of America |
|
Brian Wright |
Managed Care |
Bank of America |
|
Brad Zelnick |
Applications Software |
Bank of America |
|
Amy Lauren Young |
Real Estate |
REITology/Street Brains |
|
Edward Wolfe |
Transportation |
Wolfe Research LLC |
Ten of the Bear analysts went to regional broker dealers. This controverts another of our cherished beliefs, namely that regional broker dealers will bear the brunt of the equity research consolidation. So far, regionals have been merging, but most seem to be making do. The bulk o the consolidation is currently at the top end of the research S-curve, not the middle. Perhaps this will change as we get further into the bear market. However, even if it does, we would expect strong sector specialists like Leerink Swann, which opportunistically picked up four Bear health care analysts, to be survivors.
Two hardy Bear analysts started their own shops: Ed Wolfe, a highly ranked transportation analyst, and Amy Lauren Young, a real estate analyst who set up her own REIT service.
Short term, the collapse of the two top rated equity research groups will provide a boost to other bulge bracket research departments. There will be more commission revenues to be shared, albeit in a market with declining commission volumes. The surge in available talent will tend to keep a lid on compensation. Analysts will be happy be employed and less strappy about their bonuses.
But will this help the overall health of the equity research market? Not clear. It’s not clear that JP Morgan is committed to being a top player in equity research. Bank of America has signaled its desire to improve its equity research and Barclays seems eager to take on some aspects of Lehman. But we aren’t sure that any of them fully grasp the byzantine quid pro quos of the current bundled commission world. Ultimately, the equity research market gets healthy through greater transparency and a more rational pricing structure. It is not certain how this current round of consolidation moves us closer to that goal.
3 Comments
A senior research manager who was at Bear Stearns contacted us to correct errors and omissions in today’s blog. There were 90 senior analysts at Bear, all of whom have found jobs. This is good news for analysts entering the job market now. However, the manager also pointed out that the environment was different. There was a three month lead time from when the deal was announced in March until the merger in June, and severance provisions provided some security. The market environment also seemed to be improving. The manager notes that, although the demise of Bear was painful, there was the advantage of being the first, which Lehman will not enjoy.
Another correction is the percentage of analysts placed with JP Morgan. Approximately one third of the senior analysts were retained by JP Morgan.
Omissions included many ranked senior analysts that found jobs at other bulge firms. Full comment below:
“We had 90 senior analysts globally. All of them have been placed either at JP Morgan, at other sellside firms or on the buyside. About 1/3 went to JP Morgan. Some names on your list were associates not senior analysts. Kuni Chen was never at Bear. He was always at Bof A. They fired him and then rehired him. Other ranked analysts from Bear not on your list include John Boris who covers Pharma at Citigroup, Robin Shoemaker oil services at Citigroup, Peter Nesvold industrials at Lazard Asset mgmt. Phil Cusick telecoms at Macquarrie, Christine Augustine retail on the buyside, Rob Peck Internet at Baron Capital, David Hilder at Putnam, Sal De Martino at Banco Santander etc. Many in London are at Jefferies. The Latin team landed at Fortress and Wexford.
While this doesn’t necessarily change the thesis I take great pride personally in having helped place all the Bear analysts prior to the merger close date either internally or externally.
Many of the Bear analysts had multiple offers for both buy and sellside firms.”
Good article!
Do you think anybody remembers that Bank of America once owned Charles Schwab, Inc.? They lost a bundle on that one! And do you think anybody has thought how many internal investment management departments B of A has driven into the ground? A few months ago everybody was worried that the Countrywide acquisition would cripple B of A – and maybe even cause it’s demise. The question in my mind now: How long can it sustain Merrill’s burn rate?
When I heard the news I thought A.P. Giannini must be kicking out the slats on his coffin. In case you don’t remember old A.P. founded the Bank of Italy which became the Bank of America. Then after the depression Congress passed the Glass Steagall Act and poor old A.P. had to seperate the commercial bank from its insurance and investment operations (Transamerica Insurance). Funny thing, during the Clinton administration Robert Rubin spearheaded the emasculation of the Glass Steagall Act and after Bush’s first election Rubin headed-up Citibank for his friend Sandy Weill (see: http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html ). Not long thereafter we had “too big to fail”.
Related to “The Diaspora” article, if the markets are even somewhat efficient, then the broadly disseminated widely availeable (proprietary) brokerage house research has momentary and fleeting value (because such information is impounded into security prices very rapidly). The true value of such brokerage house research is the value of the straw-dog which helps conceal the quid-pro-quos exchanged for excess commissions paid-up above the fully-negotiated costs of brokerage execution. The Institutional Investor All Star competition is a beauty contest which helps keep the straw dog in play.
> http://query.nytimes.com/gst/fullpage.html?res=9C06E6D91E31F930A25752C1A9649C8B63&sec=&spon=&pagewanted=all
The demand for (and compensation levels of ) brokerage house employed investment research analysts may not be so directly related to the quality of their research. It may be related to other less obvious factors. (I enjoy Henry Blodgett’s writing far more now than I did in early 2000, but then, I’ve always had a preference for non-fiction) And the market might be less volitile if the number of analysts, and costs associated with analysts / touts / shills / straw dogs was reduced.
It seems that research that can be held closely and capitalized on without wide discovery is the research that truly leads to the capture of value from mispriced securities. The rest is “noise” (IMHO).
The more things change, the more they seem to remain the same.
Can anyone speak to what the common practice is in determining bonuses for buyside analysts?