How Much Do Stock Research Reports Cost
Peter Kabel is annoyed. "Analysts pay a lot of attention to DAX stocks such as Siemens or Bayer, but the companies on the Neuer Markt receive far too little coverage." When the CEO brought his Kabel New Media AG to the technology exchange a year ago, the pilots of the financial world left him by the wayside for the time being. In the meantime, thanks to good figures and intensive investor relations maintenance, the Hamburg-based eCommerce specialist is regularly assessed by at least five analysts. Nevertheless, Kabel draws the overall conclusion: "It is difficult for a small company to even be noticed." You could say so. Most financial institutions have prepared extremely poorly in terms of personnel for the protection of the IPOs on the Neuer Markt. The research departments are now reporting country because their analysts are no longer able to cope with the assessment of the company. Not only unknown or insignificant small caps are left out. For example, anyone who asked Commerzbank for an assessment of Pixelpark at the beginning of March was told: "We do not yet take care of them." The board of directors of Deutsche Börse had long since decided that Pixelpark would be promoted to the Nemax 50.
The banks are facing a real problem. The start-up boom and stock market euphoria have driven the number of new issues to an unprecedented level: between 1983 and 1996, an annual average of just 16 companies dared to go public. In 1999 around 140 companies were listed on the Neuer Markt alone, and this year it is expected to be well over 200. Who should analyze and evaluate all of them?
For companies, the answer to this question is vital. No sensible private investor, and certainly no fund manager, will invest his money in stocks about which he receives little or no information. Analysts, as the name suggests, are considered particularly qualified and credible sources. Many who discovered the share investment form together with Telekom and Manfred Krug, blindly trust the buy and sell recommendations that are being prayed up and down in more and more daily newspapers, investor magazines and TV programs. Some are more into the tips of Melinda Wiharto from the Julius Baer bank, others swear by German banker Michael Wand. Mostly without ever having seen the experts.
As gurus of the stock market age, the already overloaded experts now also have to answer masses of media inquiries. Stefan Dommers, an analyst at BHF-Bank, sometimes feels like being in a call center. As soon as he has finished a phone call, the next one calls again. Journalists ask questions about the price potential of brocade and how he assesses the failed merger of Teleplan and D.Logistics. Or a TV broadcaster may ask you to appear on a stock market show. On days like this, Dommers does not get to work as a research specialist until evening: reading company news, checking industry reports, writing analyzes himself.
Dommers doesn't complain. "Of course the many media inquiries take time," he admits, "but it is also a nice feeling to hear what you have thought about in a quiet little room." His employer really likes the interviews, they add to the bank's profile. Those who come up short are the investor relations managers who call Dommers and want to sell him their company. Usually the analyst has to dismiss anyway: "I just don't have the capacity." As a rule of thumb, even an experienced analyst cannot look after more than ten companies, at least not in the context of intensive research. This means that an institute that had the daring idea of covering every company listed on the Neuer Markt would have to hire an additional analyst after every tenth new issue at the latest. So, on average, one every two weeks, assuming around 200 new issues this year.
Analysts need experience - but it doesn't grow overnight.
Most banks would be happy if they managed to keep the status quo to some extent. It looks quite different depending on the size of the research departments: Deutsche Bank states that it covers around a third of the new market values, BHF Bank achieves around 15 percent, and a small securities trading company like Lang & Schwarz not even ten percent . At the latest when the IPO wave rolls around again, and that will probably be the case in autumn, the relationship will continue to deteriorate. Not because the institutes do not want to increase, but because they cannot.
The market for qualified analysts has been swept so empty, it doesn't get any emptier. Hans-Dieter Klein, head of the research department at Deutsche Bank, states: "The profession has not grown in line with demand." The institutes therefore chase away good people from each other with ever higher salaries, and fluctuation is enormous. The HR managers are not to be envied. The worst hit was Dresdner Bank, whose investment subsidiary Dresdner Kleinwort Benson saw a veritable exodus of analysts after the merger debacle. Such bloodletting is difficult to cope with right now.
The few courses offered by the German Association for Financial Analysis and Asset Management (DVFA) in Dreieich are fully booked by the end of the year. And anyway, it takes many months for young professionals to get used to the subject. "Financial analysts need theoretical knowledge, but above all practical experience. That doesn't grow overnight," emphasizes DVFA managing director Ulrike Diehl. Only those who have at least three years of professional experience can become a member of the DVFA, the professional association of capital market experts. So much for the standards of the professionals.
In fact, those who frequently read research reports will find serious differences in standards and expertise. Large institutes also write large studies with extensive industry analyzes, opportunity / risk comparisons and cash flow calculations up to 2010. Small securities trading houses limit themselves to brief portraits without any noteworthy depth. "We write two pages where others deliver 20," admits Marius Hoemer, an analyst at Lang & Schwarz in Düsseldorf, without further ado. Occasionally, however, short reports and updates come from well-known companies that read as if they had largely been taken from the annual report of the respective company.
When is an Analyst a Good Analyst?
Answer from Hans-Dieter Klein, Head of Equity Research at Deutsche Bank: - If he knows all the important developments in the industry - If he understands the products and their positioning - If he talks about the company's strategy with the board members can speak - if he is willing to work a lot How much does an analyst earn per year?
So much that DVPA managing director Diehl refuses to provide information because there is still so much social envy in Germany. It is known, however, that experienced analysts earn from 250,000 marks.
Analysts should be specialists - but specialists for what?
As far as the evaluation quality for the information technology sector, which is dominant on the Neuer Markt, is concerned, an industry expert such as Luis Praxmarer gives it the grade insufficient. Praxmarer is the managing director of Meta Group Germany, a large international IT consulting company. "To really understand a company, you need a detailed understanding of the industry," he says. "You have to be able to judge what kind of market segment it is, whether the customers really want the product, how the technological trends are developing. Very few financial analysts are able to do this." The experts at Meta Group are more likely. Praxmarer: "The research departments have one or two telecommunications specialists. We have 170." In the USA, the Meta Group works with the analyst company First Albany, and together they publish the weekly research report Meta Facts. A model for Germany too? "We are open to cooperation." Companies would be grateful for an increase in expertise from those who judge their business prospects. Almost every investor relations manager can immediately name one to five analysts whom he considers to be particularly capable. But everyone could certainly name one to five researchers who they consider to be particularly unqualified. Nobody does that, of course. Who will spoil it with those who judge him? Off the record, however, beautiful stories are told, for example those of the analyst at a major German bank who tormented the board of directors for four hours with detailed questions while visiting a company - and never wrote a research report. Today the investor relations manager has to laugh when she thinks back on the visit: "I think he just didn't understand us." How should someone properly judge a business that they might not even have known about two years ago? Be it in the Internet sector or in biotechnology: apparently not all analysts can keep up with the pace of development. This is the experience of PC-Ware AG in Leipzig, which went public in May. "Our business is software," says Helge-Heinz Heinker, who runs Investor Relations for PC-Ware, "we shouldn't be called a software company and compared with Vobis." Even companies that have been on the market for a long time, such as Brokat Infosystems AG in Stuttgart, cannot rely on those who are supposed to judge them have basic knowledge. "Sometimes you have to start with Adam and Eva," confirms CFO Michael Janßen.
This is of course also due to the fact that there are many newcomers in the business who first have to get used to it. "As far as the relationship between old hands and inexperienced colleagues is concerned, there is currently an imbalance in the industry," says Deutsche Bank researcher Hans-Dieter Klein - this is also a consequence of the shortage of analysts, who are increasingly coming to the fore leaves.
Companies cannot choose their judges, but they try to cherish and nurture them. Investor relations have long enjoyed priority in most companies and are managed as intensively as professionally. Deutsche Bank's strict criteria for "IR-active companies" (see margin) were met by more than 60 percent of IPOs in the first half of 1999. Mishaps from the pioneering days of the New Market - when CEOs complained at analyst conferences about the high costs of converting to US GAAP ("I didn't know that") or CFOs at dinner with institutional investors after a few glasses of wine about the urge to be honest were overpowered - people now tell one another, amused, as anecdotes. "Today the managers are all well trained. They know exactly how to behave," observes Marius Hoemer from Lang & Schwarz.
It is also known in companies today that not every company valuation counts equally. It is nice to get top marks from the Hamburgische Landesbank, but at least for professional investors it is much more difficult when the Deutsche Bank gives a buy recommendation. At the top of the wish list for companies that are orientated towards the USA and Great Britain is a "Buy!" by Morgan Stanley Dean Witter and Credit Suisse First Boston. Brokat CEO Janßen sums it up in a nutshell: "If you want Anglo-Saxon investors, you need Anglo-Saxon analysts." What Deutsche Bank demands from IR-active companies: - Independent IR department with at least one full-time employee - Hierarchical establishment of the IR department on the Management Board - Company value-oriented alignment of IR goals and focus of IR measures on financial analysts and institutional investors - More than ten hours of time spent by the board on IR per week - at least two road shows per year - at least 20 one-on-ones with investors per year - at least ten one-on-ones with analysts per year - very high or at least high importance of the Shareholder value concept in the company - coverage by more than six financial analysts Analysts can be approached - but they cannot listen to everyone.
Knowing that is one thing, putting it into practice is another. With the great competition for scarce analyst capacities, the CFOs can still present themselves perfectly at the right address - the effort is usually in vain. For the researchers, three points play a role in the selection process: First priority is given to companies that their own bank has supported during the IPO. Second, it is about sheer size, i.e. the market capitalization of a value. The heavyweights of the Nemax have a clear advantage in this way. In third place is the company story. Smaller companies also have a chance here. Not a very large one, however.
The problem is that the research departments are primarily committed to the institutional investors, called "instis" in industry jargon. This includes the in-house investment departments and external fund managers. If they go into a value, then correctly, with amounts in the millions. In the case of small companies with a low market capitalization, this has an immediate impact on the price development. This is extremely impractical, both when buying, when one's own demand causes the price to rise, and even more when reducing the position, when one's own supply dilutes the price. For example, when two US funds recently sold their shares in Emprise Management Consulting AG, the price fell within three weeks from over 100 to under 50 euros. That is why the institutes prefer to keep their hands off such commitments. For the analysts, there is no important reason to evaluate.
So it is no wonder that many hopefully started companies are left in the rain after the IPO, even if the issue was well placed. It happens that an executive board with an elaborate presentation and the entire staff travels to Frankfurt especially for the analyst conference - and then sits in front of empty chairs. "It's tough when the capital market signals in this way: no interest," comments an industry insider. The DVFA has reacted: Since May it has been providing its members with an online service that allows analysts to access company information. Company presentations will also be broadcast shortly. The hope is that more analysts will look in if the journey is omitted.
Those who can at least rely on their syndicate banks are still lucky. Actually, it is customary that at least they ensure the so-called follow-up. But not even that is guaranteed in these turbulent times. Bernhard Krauss, Investor Relations Manager at Transtec, reports snuffily about the behavior of a consortium bank: "First the contact was good, then there was a change in staff and we were sent from Hinz to Kunz.Now the position is allegedly filled again, but the gentleman does not move. "Kabel New Media also had the bitter experience that one of their syndicate banks ceased coverage shortly after the IPO. Reason: The department had to handle so many IPOs that there was no time to look after existing customers.
How do you become an analyst?
There is no regular training. So far, most analysts have had a career in banking or are career changers. The German Association for Financial Analysis and Asset Management (DVFA) in Dreieich offers training to become an investment analyst, which ends with a diploma. The prerequisite is a university degree or a comparable level of knowledge plus two years of professional experience. The training lasts 32 days and costs around 16,000 marks. From October 2000 the DVFA will offer a new training. It is aimed primarily at university graduates from the natural sciences and technical fields who are trained to become "DVFA specialist analysts" through the acquisition of additional knowledge. Biotechnology will be offered first in autumn, followed by information technology next year.
Contact: [email protected] Practical tips for investor relations - Don't wait for analysts to contact you, take action on your own. Call us and explain the story of your company in a nutshell.
- If an analyst is interested: invite them to visit the company and talk to the CEO or CFO.
- If analysts are interested but declare that they do not have time for an on-site visit: meet them. You can team up with other companies so that the costs do not rise to the limit. Transtec AG from Tübingen, for example, held a conference in Frankfurt last year together with Heilbronner TDS and the Stuttgart Cenit. Such community events also have the advantage of attracting more participants.
- Find out about the services of the German Association for Financial Analysis and Asset Management (DVFA). A package that includes participation in an analyst conference is available for as little as 1500 marks.
- Your forecasts must be credible and reliable. If you overdo it and later have to give in, you risk a serious loss of confidence.
- Even if an analyst takes an opinion that you absolutely do not share: don't get upset. Explain calmly and objectively why you disagree. Don't try to persuade him, try to convince him!
How independent are analysts?
The impression of independence and objectivity that the term "analyst" suggests is a myth.
It is relatively well known that the recommendations of the syndicate banks should be treated with caution. For image reasons alone, the banks are interested in the success of the companies that they have listed on the stock exchange. In fairness it has to be said that good analysts are not overly impressed by this fact. Example Pixelpark: In November 1999 Goldman Sachs rated the share as an outperformer and advised it to buy, while Michelle Lang from Sal. Oppenheim put the stock on Reduce because it was clearly overvalued. Both houses belonged to the issuing consortium.
On the other hand, there is less awareness that analysts run the risk of losing their distance with companies that they have looked after for years. The contacts are close: It is customary for the analyst to visit the company, meet at conferences and make regular phone calls. That is definitely in the analyst's own interest. After all, he depends on the company's information if he wants to come to a realistic assessment - and that is important to him. "No house will allow itself to have someone in its research department who is constantly missing the mark," says Düsseldorf analyst Marius Hoerner.
Clever companies involve the researchers as much as possible in decision-making processes. "For me, an analyst is like a doctor diagnosing the state of health of the company," says Markus Kerber, CFO at G FT Technologies AG in St. Georgen. Uncle Doktor quickly becomes a valued advisor whose opinion on a planned acquisition can be obtained in advance. Anyone who is in my boat like this, however, is hardly objective in their judgments.
What only insiders know: The analysts usually present their reports to the companies before they publish them. In this way, it is said, mistakes are to be avoided. But of course individual assessments are also discussed. "I can't convert a sell recommendation into a buy recommendation," says one board member, "but oh the long-term growth rate is 45 or 48 percent, that's something we can talk about." Analysts who dare to make negative assessments must expect sanctions. According to a survey of 350 listed stock corporations in Europe, every fourth AG reacts by breaking off business relationships and excluding company presentations when an analyst makes a sell recommendation. Even if the result can only be transferred to Germany to a limited extent, it shows how strong the sensitivities are.
If the relationship is good, however, it is often very permanent. When analysts move to other institutes, they often take "their" companies with them.
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