Lipstick, Pigs, and IPOs — a 2000 Redux?
The article by Rolfe Winkler in the 29 June edition of the Wall Street Journal stirs unpleasant memories for those of us in the analyst profession. In what Winkler characterizes as “walking through Chinese walls,” he laments the link between investment banking activities and stock analysts among investment banks working on LinkedIn’s IPO. Harkening back to the dot.com bubble in 2000, his article reflects a growing concern that the partitioning mandated by the 2003 analyst independence legal settlement that investment banks reached with state and federal industry regulators may be crumbling. Specifically, he asks whether the financial analyst corps once again are touting IPOs in order to secure lucrative underwriting business. As the leading organization for ethics in this profession, we too see emerging similarities to the dot.com days of old.
We vividly recollect the intercepted e-mails of high-profile analysts who peddled “hot” IPOs, with no actual earnings and few prospects. In order to sell these “pigs,” as one analyst boasted, to the investing public, all that was needed was to dress them up with a bit of market hype and spurious research opinions. It was a technology gold rush in 2000, after all, and the public was clamoring for the next big thing. Instead of demanding actual sales and profits at these emerging companies, it was enough for investors to get in on the ground floor of a company with new technology and innovative ideas. Who needs profits when there are vast numbers of followers, eyeballs, and open rates, or so the thinking was at the time. The potential in those days for enormous advertising revenues farther down the road was highly convincing. And that mania propelled dozens of hot, new dot.coms to go public. Today, you can probably count on one hand the number of survivors.
It would be entirely naive to think that the business of finance is now somehow immune to the pitfalls we saw in the heady days of the dot.com bubble. History tends to repeat itself, especially when the opportunity is rife for turning a quick buck. Stretching the rules and employing the tried-and-true promotional tricks of Wall Street for marketing initial public offerings seems evergreen.
For our part, CFA Institute has developed the highly regarded Code of Ethics and Standards of Professional Conduct, which prohibit members from engaging in unsupported spin and recommendations that are not well founded or documented. Even so, it will always be difficult to separate pure marketing hype from honest research. And firms and analysts will be highly sensitive to inadvertent e-mail chatter.
In the end, all of these communications, whether deeply researched analysis or promotional puffery, are opinions based on a number of subjective factors and estimates. Short of an analyst flat out admitting the opinion is garbage in an e-mail to a colleague, the best you can do as an investor is to understand and recognize the conflicts that exist. Knowing how to dissect the salesman’s pitch in the highly charged environment of IPO investing requires experience. Beware of pigs wearing lipstick.
