Call me naive, but I didn’t know that companies launching IPOs were still overtly shopping around for banks with favorable analysts—a conflict of interest that caused some of the most memorable scandals of the dot.com bubble era.
The Wall Street Journal corrects my misimpression with a profile today of a Citigroup Internet analyst Mark Mahaney, who’s bringing in big business for the bank that coincides with favorable recommendations of stocks. Analysts, it turns out, can still help sell IPOs to investors, even if their compensation can’t be tied to bringing in business. This is clearly a potential problem:
For a company picking underwriters, this means it can interview analysts about their views of the company—in other words, a company could potentially fish for the most favorable research.
In this case, the Journal reports that Citigroup’s IPOs got more favorable ratings from Mahaney than did the non-Citi IPOs he rated:
Companies that chose Citi as a lead bank on their IPOs last year tended to get a favorable rating from Mr. Mahaney. On Citi-led deals in 2011, he awarded three “buy” ratings — for Active Network Inc., Bankrate Inc. and Zillow—and one “neutral,” for Groupon Inc. He initiated coverage on four non-Citi led IPOs, with three “hold” ratings and one “buy.”
The three Citi IPOs he rated “buy” have underperformed the market by an average of 5.7 percentage points; the non-Citi IPO stocks he rated “neutral” have done worse, underperforming by an average of 45 points.
While it’s interesting that Mahaney’s Citi-led “buys” have trailed the market, six percentage points is hardly a smoking gun, particularly when the non-Citi “neutral” recommendations have performed much worse. The WSJ does a good job of pointing out possible conflicts without insinuating that it thinks something nefarious is happening. I would have liked to have seen how his non-Citi led “buy” has performed. It’s worth noting that his “neutral”-rated Groupon is down 31 percent from its IPO price.
There are other good details here like the fact Mahaney worked for Mary Meeker, one of the most infamous of the bubble-inflating analysts, and worked for Galleon Group. The paper probably tempted to play up the Meeker connection, but it was probably wise to resist.
I would have liked to have seen more on other analysts. This is all we get on that, and it’s pretty weak:
Having a top-ranked analyst in the thick of the marketing effort during an IPO can help sway sentiment. In the $805 million Groupon IPO completed in November, Internet analyst Justin Post of Bank America Merrill Lynch, one of the deal’s 11 managers, said during a conference call on Oct. 31 that Groupon could roughly triple its current rate of “gross billings”—the amount collected from customers for deals sold—to $15 billion in the next five years, according to people familiar with the matter. That was considered an optimistic assessment.
How did Post’s assertion help sway sentiment? We’re not told.
But this is good work overall.