Sell-side equity research analysts have been at the epicenter of the subprime-mortgage-triggered temblor that has convulsed Wall Street over the past year and reshaped the U.S. financial landscape. As they have worked to guide their clients through potentially the most devastating and far-reaching financial catastrophe to hit the U.S. since the Great Depression, they have also had to worry about the stability of their jobs, their firms and their own financial futures.
For many analysts those fears have been well founded. One bank after another has fallen victim to the credit crisis: Bear Stearns Cos. was acquired by JPMorgan Chase & Co. in May in a government-backed takeover. Last month, Lehman Brothers Holdings declared bankruptcy after failing to find a buyer, although one day later Barclays announced it would acquire some of the firm’s assets, including its highly regarded research operations. Merrill Lynch & Co. agreed to be bought by Bank of America Corp. Wachovia Corp. agreed to sell its retail banking assets to Citigroup, then changed course and agreed to be acquired whole by Wells Fargo & Co. instead. Goldman, Sachs & Co. and Morgan Stanley are now commercial banks.
Despite the turmoil, analysts have kept the focus on investors, which have sought advice and reassurance in a time of seemingly endless negative economic news, triple-digit swings in the Dow Jones industrial average and unprecedented government intervention that has resulted in the seizure of mortgage-lending giants Fannie Mae and Freddie Mac and insurance behemoth American International Group, and the forced sale of the nation’s biggest savings and loan, Washington Mutual — not to mention the controversial $700 billion bailout of the financial system.
“The sell side is a service business, and our top priority is our clients,” says Mark Schoenebaum, an analyst at Bear Stearns until June, when he accepted an offer from Deutsche Bank Securities. “Our clients, on average, are suffering too, and it’s our job to think of ways to help them. We need to keep doing what we do best and keep from being distracted.”
Stuart Linde, who was director of U.S. equity research at Lehman Brothers, shared a similar sentiment in an interview just days before the firm filed for bankruptcy protection. “All of our analysts are here, at their desks, serving clients — that’s what we do, and we do it better than anyone,” he said.
Linde is justifiably proud of the work his team at Lehman has done. Polling for the 2008 All-America Research Team survey was completed in July, the votes tabulated in August, and in what can only be called a bittersweet victory, investors declared Lehman’s researchers the best in the business for a sixth straight year.
The Lehman team — now a part of Barclays Capital, which receives credit in our rankings — widens its lead over No. 2 JPMorgan, capturing 45 total positions, one more than last year, compared with JPMorgan’s 38, the same as in 2007. Merrill Lynch jumps two spaces, to No. 3, capturing 36 positions, six more than last year. Citi, with 33 positions, slips one spot, to fourth place, while UBS zooms from eighth place to fifth, with 26 positions. The ranking is based on responses from more than 3,000 investment and portfolio managers at more than 830 firms — including 87 of the 100 biggest U.S. equity managers — that manage an estimated $12.7 trillion in U.S. equities.
The upheaval on Wall Street is reflected in our results, with 19 of the No. 1–ranked analysts new to the spot since last year — and 13 of those appearing on top for the first time. The photographs beginning on page 67 introduce some of the analysts who are enjoying their debut appearances in the winner’s circle, including Anthony DiClemente, top-ranked in Radio & TV Broadcasting, who moved to Barclays Capital after its parent acquired Lehman Brothers last month; Charles (Brad) Hintz of Sanford C. Bernstein & Co., No. 1 in Brokers & Asset Managers; Mark Mahaney of Citi, No. 1 in Internet; and Heather Wolf of Merrill Lynch, who captures the crown in Banks/Midcap.
Some of these new sector leaders replace familiar faces. Victor Miller IV, who was No. 1 in Radio & TV Broadcasting for the previous six years, changed careers in June, after his former employer, Bear Stearns, was acquired by JPMorgan. Miller became chief services officer of GodTube.com, a Christian-themed Web site headquartered in Plano, Texas. Anthony Noto, No. 1 in Internet for the previous five years, left Goldman Sachs in January to become chief financial officer of the National Football League.
Several former Bear Stearns analysts made the transition to new firms without losing their top-ranked status. Joseph Greff and Andrew Steinerman moved to JPMorgan and finish at No. 1 in Gaming & Lodging for a third straight year and in Business & Professional Services for a fourth straight year, respectively. Edward Wolfe launched his own firm, Wolfe Research, in April and holds the top spot in Airfreight & Surface Transportation for a sixth consecutive year.
Schoenebaum, who moved from Bear to Deutsche Bank and extends his reign as the top-ranked researcher in Biotechnology to a fourth consecutive year, says he has “total empathy” for analysts facing uncertain futures as their firms are acquired by former rivals. “When Bear blew up, I hoped for the best and assumed the worst,” he says. His transition has been relatively smooth, he explains, because “the client base is very similar,” and he has spent much of the past few months rewriting reports, updating financial models and establishing a rapport with his new colleagues. “The challenge is to earn my stripes internally, get to know the institutional sales force and gain their respect,” Schoenebaum adds. “Without that, it’s very difficult to maintain a franchise externally with clients.”
Managed Care analyst John Rex, the only Bear Stearns health care researcher hired by JPMorgan, also succeeds in retaining his No. 1 ranking — for a fifth year running.
“I will never forget that week,” Rex says of Bear Stearns’ March meltdown. “I was in my own world at a London health care conference when my sector imploded and Bear was getting hit as well. I remember crossing time zones and going 50 hours with very little sleep. I had no idea what I was coming back to, because I had never been through anything like that before.”
Rex says it was important to maintain his research output, because “when stocks are moving rapidly — especially when they are moving down — there is always a correlation with a rising need for information.”
Thomas Schmidt, research director at Rex’s new firm, agrees that there has been a surge in demand from investors. “This year we have been seeing once-in-a-lifetime events, and clients are looking to rely on experienced analysts,” he says. “We are being asked for more guidance than in the past.”
That increase in money managers’ expectations, coupled with the opportunity to choose the top people from two research departments while keeping the analyst head count stable, at 75, compelled the JPMorgan integration team “to make sure we had only the best people, so we would be stronger after the merger,” Schmidt says. “We didn’t always take who might appear to be the obvious candidate, and our decisions were based on the long term, not just the next six months. In the end, we got just about everybody we wanted, and there were some talented people at JPMorgan who were let go. It was not easy.”
Linde, now director of Americas equity research at Barclays Capital, faces a slightly different challenge. “Barclays did not have an equity research department prior to the Lehman acquisition, and they are excited to have one now,” he explains. “Everyone from Lehman’s U.S. research operations moved over — we have not lost a single equity analyst.”
Fixed-income analysts at the combined firm face a far less certain future: Barclays Capital already had a fixed-income research department before picking up the 165 credit analysts Lehman employed. In a statement released one week after the acquisition, Richard Ricci, chief operating officer of Barclays’ investment banking business, said the firm is “evaluating where we have overlap between Lehman and Barcap employees.” Barclays has set aside $2.5 billion to cover potential severance and retention costs. Decisions about which former Lehman employees will be offered permanent positions will be made in December.
Linde says his first priority at the new firm was to get information into the hands of clients. “We launched coverage of 700 companies the week after we moved to Barclays,” he says, “and another 300 a few days after that.” The 74-member equity research team had tracked 1,100 companies at Lehman, and Linde says they will be back to that level of coverage very soon.
Another goal is to foster relationships between equity and fixed-income analysts. “Every time we make a call, we should ask the best way to express it — should it be a straight equity call? Is there an opportunity in derivatives? Our coverage should be as broad-based as possible, utilizing all of the talent we have available here.”
The financial crisis is accelerating client demand for a more holistic view of their investments, and research departments are responding accordingly. “We now have our fixed-income and equities departments on an open floor, and there is a lot more collaboration,” explains Steven Tighe, head of Americas equity research for Merrill Lynch. “We are taking a much more integrated approach, looking not just at stocks but also fixed income, derivatives and foreign exchange. Investors need to know whether a company is highly leveraged or not and whether companies have access to the credit markets.”
Merrill’s acquisition by BofA, which is expected to be completed in January, will result in considerable analyst overlap. In fact, adding Merrill’s 36 total team positions in this year’s survey to BofA’s ten would result in Banc of America Securities’ topping this year’s All-America Research Team surve.
Saying “this is a sensitive time,” owing to the impending acquisition, Tighe declined to give exact numbers for his analyst head count, acknowledging only that “it’s down slightly from a year ago — but we haven’t pulled back from any areas. We’ve had to be more efficient with our coverage.”
One way the firm has done that is by taking a more regional and, in some cases, worldwide approach to research. As to coverage of telecommunications companies, for example, “we think in terms of North American coverage, not just the U.S., with one analyst handling the entire region,” Tighe says. “Paper and packaging is truly global, and our analyst follows stocks in Europe, North America and emerging markets. We have a lot of analysts around the world, and they work together as a global group.”
Jonathan Rosenzweig, Citi’s director of research for the Americas, says his firm is taking a similar approach. “Clients are much more interested in a global context, and they want analysts who are able to work across regions, across sectors and across asset classes,” he says. “The days are over when analysts worked only in their own franchises, silolike. You need to be collaborating with other analysts, because sectors are interwoven, especially with an economy facing so many different kinds of challenges.”
Citi has 350 analysts in 23 locations around the world, and they cover 3,100 stocks in 58 countries. The analyst head count is down about 7 percent from last year, Rosenzweig says.
This year’s biggest gainer, Credit Suisse, which vaults from No. 11 to No. 7, was among the few firms to increase its U.S. equity analyst head count over the past year, from 63 to 67. The firm is also taking a more broad-based approach to research.
“People don’t see value solely in finding out whether a particular company has won another contract to add to revenue growth — they want to understand the way markets as well as sectors function,” says Lara Warner, director of U.S. equity research. “It’s challenging to build a culture that can operate across borders, and it is not done cheaply, but this is what clients are demanding.”
For a more in-depth look at the All-America Research Team, click here to view The Best Analysts of the Year.
