Acommon and pervasive misperception about the sell-side is that smalland

micro-cap public and private companies need not apply. That’s not

entirely accurate. Though the consolidation of investment banks has created

financial conglomerates oftentimes incapable of generating profits from

smaller companies, we believe these “small caps” should pursue the sell-side

and research coverage nonetheless. IR that fully understands the sell-side,

who they are, and what they do, can help any size company, public or private,

take on this challenge.

The sell-side represents an important link between investors and corporations.

For those companies looking for capital, the sell-side has access to

investors and the means and motivation to service them. For investors, it

gives them access to investments, and even creates new products in the form

of IPOs, debt issues, or secondary offerings. It also offers research, sales and

trading execution, and liquidity. The sell-side’s ability, through its analysts,

to provide research on companies and recommend stocks underscores the

analyst’s importance in the capital markets. Even for the smallest publicly

traded entity, a sell-side analyst can be an effective vehicle to legitimize a

business and attract new investors.

That said, a company with $20 million in market capitalization will

likely find it futile to pursue an analyst at one of the blue-chip Wall Street

firms. Larger firms need larger fees to stay in business, and the best way to

earn larger fees is to focus investment banking, research, and trading activities

on larger companies; also, roughly the same amount of time and resources

is needed to do the work, regardless of size. Three percent of a $20

million equity transaction is a far less attractive fee for an investment

banker than 3 percent of a $200 million equity transaction. Similarly, a

stock that trades 100,000 shares a day at $0.04 commission is far more atp1

tractive to trade than an illiquid small-cap company that trades 10,000 each

day at best.

Each company should play in its own league and look for the best

sell-side fit. Big companies should target the blue-chip investment banks,

like Goldman Sachs or Morgan Stanley, whereas small companies should

direct their efforts to the small, yet high-quality banks set up to service

smaller public entities. Analysts and firms are available for just about

any company, but what’s important is finding one to support that company’s

goals.

THE SCOOP ON THE SELL-SIDE

The players on the sell-side are research analysts, investment bankers,

traders, sales traders, and institutional salespeople or brokers. Brokers work

with their clients, both institutional and retail (mom-and-pop), to assist

them with, and facilitate, their investment choices. They hand-off buy and

sell requests to their traders, who execute the buying and selling of stocks

and bonds in the market. To help the traders manage risk—not owning or

shorting too much of any given stock at any given time—sales traders are

there to locate buyers when too many sell orders are flowing into the firm,

or locating sellers when an overabundance of buy orders for a given issue

flood the trading desk.

Following a select group of stocks with a variety of recommendations

are analysts in the research department. Analysts cover or publish on a relatively

small number of companies and/or industries and make stock recommendations

based on extensive due diligence and analysis. These reports are

used directly by the buy-side for investment guidance, although employees,

customers, suppliers, and the media also look at them as key sources of intelligence.

Research can be powerful and relevant, and despite the malfeasance of

the late 1990s, hundreds of extremely hard-working, intelligent, and ethical

analysts work in this industry.

However, the consolidation of the investment banking landscape resulted

in fewer banks and, by definition, fewer analysts. For the most part,

they are being paid less, partially because of new rules that prohibit the investment

banking divisions from compensating analysts. Also, analysts are

under intense regulatory and legal scrutiny, both internally and externally.

When many of the most experienced analysts left their practices, the assumption

was made that the quality of research would deteriorate, but quality

research is still very relevant and available:

Research is still a very important source for unbiased views on any

company.

The media, trades, employees, and competitors all read it.

Research still has an effect on visibility, liquidity, share price and valuation.

Because of the above factors, research affects the overall cost of capital,

which can fuel a company’s expansion.

The sell-side also employs investment bankers. They are product creators

who facilitate transactions, such as IPOs, mergers, and bond offerings

that create value for companies and shareholders. In the case of an IPO, the

banker essentially packages the soon-to-be public company as product and

the institutional sales forces sells it to their clients, such as Fidelity. The

traders then manage share inventory on the trading desk post-transaction,

and the analyst publishes research on the company and assesses whether the

stock is a Buy, Sell, or Hold given the circumstances.

Research and sales and trading, and the investment banking function of

the business work separately, with a figurative Chinese Wall keeping information

from passing between them. In concept, this agreement keeps the

day-to-day capital markets function from the inside information that

bankers need to do their jobs. During transactions, such as underwritings of

debt or equity, the investment banks have procedures that support the intention

of securities laws and keep research and banking apart. We all know

now that the process broke down in the late 1990s in a rush to complete

transactions and generate massive fees and salaries.

In addition to the large investment banks, there are many smaller boutiques

that specialize in certain industries or investment approaches. There

are also regional houses that focus on local companies and investors. Many

of these offer brokerage, banking, and research services and can be great

partners to smaller, fast-growing companies. Finally, there are numerous independent

research firms that only publish research and have no investment

banking capabilities.

IR RELATIONSHIPS WITH THE SELL-SIDE

For the IR professional, sell-side relationships are extremely important.

While knowledge of how the sell-side works is a necessity, knowing how to

position a company for research coverage is one of the most important fundamentals

of IR. On any given day a sell-side analyst talks to dozens of portfolio

managers, the press, industry professionals, and other company execu-

The Sell-Side Disclosed: Who They Are and What They Do 15

tives. Directing the perception of the sell-side is a highly effective means of

leveraging the corporate message.

Analysts are very busy with a crowd of publicly traded companies to

pick through and possibly recommend. While they want to find the best investment

opportunities for their clients, they don’t always have the time and

resources to follow up on every interesting prospect. Given these facts, IR

professionals are essentially competing for shelf space in the analyst’s mind,

and the best way to get on the shelf is to think as analysts do and understand

how they are compensated. The IR professional typically has a small window

of opportunity to deliver the company story, and that story must appeal

immediately to the analyst as a stock picker. The profile of the company

should also be attractive in terms of potential investment banking and trading

fees, but that shouldn’t be the analyst’s concern given the new regulatory

environment. That said, all analysts can quickly determine if a company fits

the overall philosophy and focus of their sell-side employer.

THE SELL-SIDE/BUY-SIDE RELATIONSHIP

The buy-side, both institutional and retail (individual investors), execute

their investments through the sell-side. They rely on the brokers and traders

to execute their orders in a timely and reliable fashion, a relationship that is

integral to the capital markets.

Buy-side investors also rely on the research analyst’s narrow focus.

While a sell-side analyst might cover 15 or 20 companies, his or her counterpart

on the buy-side may own 50 or 100. Because the sell-side is insinuated

into every aspect of an industry, the buy-side relies on them for market

intelligence, industry information and opinions, as well as access to companies

and management.

EQUITY RESEARCH

Equity research was created after the sleepy stock market days of the 1930s

and 1940s, when investors were still a bit market-shy from the 1929 crash.

Broker Charles E. Merrill and his firm Merrill Lynch wanted to bring the information

to average American families. He thought research papers with

in-depth information and recommendations on certain companies and industries

would ease avenues of access to what had once been the domain of

the wealthy or speculative few.

As more investors entered the market, firms continued to provide research

to their sales and trading clients for a fee, but it was also a customer service offering for investors who did their business with, and provided trading

commissions to, that firm. Eventually, analysts became known for their

expertise and pulled investors and companies to the firm for trading and investment

banking business.

Equity research provides in-depth analyses of companies, as well as

overviews of the industries in which those companies compete. The analyst’s

objective is to do a complete analysis of a company in order to estimate its

value relative to the current stock price and then make an “actionable” recommendation

to investors. These recommendations are bannered at the top

of all research reports and differ from firm to firm. Generally, however, there

are different scales of recommendations, including Strong Buy, Hold, and

Sell. In reality, there are many other ratings, including Buy, Outperform,

Long-Term Buy, Moderate Buy, and Accumulate. These, unfortunately, can

be the equivalent of either Hold or even Sell recommendations and are designed

not to offend management teams, thereby preserving access, the

lifeblood of an analyst. Without these ratings, management would certainly

be bothered or angry (Sell recommendations in writing don’t sit well with

CEOs), and an analyst might be cut off from access and ultimately the

ability to do his job. Underperform, Moderate Sell, Sell, and Strong Sell

are truthful recommendations and analysts who utilize these ratings, although

very rare, are real stock pickers. Table 2.1 shows the anatomy of a

research report.

The IR aspiration of getting a company noticed and creating interest in

the stock is best met through the analysts and their research reports, which

is called coverage. Unless a company is fairly substantial, with a market cap

over $100 to $200 million, getting coverage can be a battle. IR that understands

how an investment bank works and can establish a relationship with

an analyst is best positioned to get coverage.

The first step is to get on an analyst’s radar. Analysts pride themselves

on the depth and range of their industry expertise, and with shrinking staffs,

many analysts don’t have time to learn every fact. IR can make analysts

smart by delivering timely and incrementally valuable information about the

company or the industry. Even if that analyst doesn’t write a research report

on the company, an information-sharing relationship might result in a mention

in an industry report.

In pursuit of a voice, private companies should also think about targeting

the analysts. Much of the media exposure on private and public companies

includes an analyst quote because analysts are seen as highly credible,

third-party validators. As the analyst works to paint a comprehensive picture

of the industry, the private company must convince the analyst that any

portrait without them is incomplete.

ECONOMIC EVENTS

IR should help the analysts plant the seed for trading commissions and

banking fees by creating economic events that generate these commissions

and fees and create paydays for the analysts and their investment banks.

There are numerous above-board ways for a company to facilitate economic

events that will continually reward analysts with well-thought-out research

coverage (not necessarily any particular rating), which is discussed in Chapter

24, “Meeting the Street.”

THE IR IMPERATIVE

Analysts, in order to do thoughtful analysis and judge stocks fairly, need the

right information, communicated clearly, from sources they trust as reliable.

Analysts sometimes find people who don’t really address what is needed.

Some executives just don’t have the time to share their story. Others don’t

know what analysts want or need. A few are worried about sharing information,

even positive information, that might be misunderstood or misrepresented.

Others have flaws in their strategy or operations and opt to keep

quiet until the problems are fixed. Many companies just aren’t aware of how

best to describe their businesses and strategies to The Street.

A company that is going to be public might as well be the best public

company it can be and do right by the shareholders. Unfortunately, in all

these cases, management isn’t necessarily doing what is in the best interest of

its shareholders, and that’s blatantly wrong.

The reason we came into IR as former analysts and buy-side professionals

was to mitigate the losses incurred in translation, to help companies tell

their story without being misunderstood or misrepresented, and to help analysts

get the best information they could for thoughtful and fair analysis.

IR’s mandate is to fully understand the sell-side in the broader context of its

employer, the investment bank, which is the best way to increase chances for

coverage. Without this information, companies that spend lots of time and

money approaching Wall Street analysts are probably wasting both.

Acommon and pervasive misperception about the sell-side is that smalland

micro-cap public and private companies need not apply. That’s not

entirely accurate. Though the consolidation of investment banks has created

financial conglomerates oftentimes incapable of generating profits from

smaller companies, we believe these “small caps” should pursue the sell-side

and research coverage nonetheless. IR that fully understands the sell-side,

who they are, and what they do, can help any size company, public or private,

take on this challenge.

The sell-side represents an important link between investors and corporations.

For those companies looking for capital, the sell-side has access to

investors and the means and motivation to service them. For investors, it

gives them access to investments, and even creates new products in the form

of IPOs, debt issues, or secondary offerings. It also offers research, sales and

trading execution, and liquidity. The sell-side’s ability, through its analysts,

to provide research on companies and recommend stocks underscores the

analyst’s importance in the capital markets. Even for the smallest publicly

traded entity, a sell-side analyst can be an effective vehicle to legitimize a

business and attract new investors.

That said, a company with $20 million in market capitalization will

likely find it futile to pursue an analyst at one of the blue-chip Wall Street

firms. Larger firms need larger fees to stay in business, and the best way to

earn larger fees is to focus investment banking, research, and trading activities

on larger companies; also, roughly the same amount of time and resources

is needed to do the work, regardless of size. Three percent of a $20

million equity transaction is a far less attractive fee for an investment

banker than 3 percent of a $200 million equity transaction. Similarly, a

stock that trades 100,000 shares a day at $0.04 commission is far more atp1

tractive to trade than an illiquid small-cap company that trades 10,000 each

day at best.

Each company should play in its own league and look for the best

sell-side fit. Big companies should target the blue-chip investment banks,

like Goldman Sachs or Morgan Stanley, whereas small companies should

direct their efforts to the small, yet high-quality banks set up to service

smaller public entities. Analysts and firms are available for just about

any company, but what’s important is finding one to support that company’s

goals.

THE SCOOP ON THE SELL-SIDE

The players on the sell-side are research analysts, investment bankers,

traders, sales traders, and institutional salespeople or brokers. Brokers work

with their clients, both institutional and retail (mom-and-pop), to assist

them with, and facilitate, their investment choices. They hand-off buy and

sell requests to their traders, who execute the buying and selling of stocks

and bonds in the market. To help the traders manage risk—not owning or

shorting too much of any given stock at any given time—sales traders are

there to locate buyers when too many sell orders are flowing into the firm,

or locating sellers when an overabundance of buy orders for a given issue

flood the trading desk.

Following a select group of stocks with a variety of recommendations

are analysts in the research department. Analysts cover or publish on a relatively

small number of companies and/or industries and make stock recommendations

based on extensive due diligence and analysis. These reports are

used directly by the buy-side for investment guidance, although employees,

customers, suppliers, and the media also look at them as key sources of intelligence.

Research can be powerful and relevant, and despite the malfeasance of

the late 1990s, hundreds of extremely hard-working, intelligent, and ethical

analysts work in this industry.

However, the consolidation of the investment banking landscape resulted

in fewer banks and, by definition, fewer analysts. For the most part,

they are being paid less, partially because of new rules that prohibit the investment

banking divisions from compensating analysts. Also, analysts are

under intense regulatory and legal scrutiny, both internally and externally.

When many of the most experienced analysts left their practices, the assumption

was made that the quality of research would deteriorate, but quality

research is still very relevant and available:

Research is still a very important source for unbiased views on any

company.

The media, trades, employees, and competitors all read it.

Research still has an effect on visibility, liquidity, share price and valuation.

Because of the above factors, research affects the overall cost of capital,

which can fuel a company’s expansion.

The sell-side also employs investment bankers. They are product creators

who facilitate transactions, such as IPOs, mergers, and bond offerings

that create value for companies and shareholders. In the case of an IPO, the

banker essentially packages the soon-to-be public company as product and

the institutional sales forces sells it to their clients, such as Fidelity. The

traders then manage share inventory on the trading desk post-transaction,

and the analyst publishes research on the company and assesses whether the

stock is a Buy, Sell, or Hold given the circumstances.

Research and sales and trading, and the investment banking function of

the business work separately, with a figurative Chinese Wall keeping information

from passing between them. In concept, this agreement keeps the

day-to-day capital markets function from the inside information that

bankers need to do their jobs. During transactions, such as underwritings of

debt or equity, the investment banks have procedures that support the intention

of securities laws and keep research and banking apart. We all know

now that the process broke down in the late 1990s in a rush to complete

transactions and generate massive fees and salaries.

In addition to the large investment banks, there are many smaller boutiques

that specialize in certain industries or investment approaches. There

are also regional houses that focus on local companies and investors. Many

of these offer brokerage, banking, and research services and can be great

partners to smaller, fast-growing companies. Finally, there are numerous independent

research firms that only publish research and have no investment

banking capabilities.

IR RELATIONSHIPS WITH THE SELL-SIDE

For the IR professional, sell-side relationships are extremely important.

While knowledge of how the sell-side works is a necessity, knowing how to

position a company for research coverage is one of the most important fundamentals

of IR. On any given day a sell-side analyst talks to dozens of portfolio

managers, the press, industry professionals, and other company execu-

The Sell-Side Disclosed: Who They Are and What They Do 15

tives. Directing the perception of the sell-side is a highly effective means of

leveraging the corporate message.

Analysts are very busy with a crowd of publicly traded companies to

pick through and possibly recommend. While they want to find the best investment

opportunities for their clients, they don’t always have the time and

resources to follow up on every interesting prospect. Given these facts, IR

professionals are essentially competing for shelf space in the analyst’s mind,

and the best way to get on the shelf is to think as analysts do and understand

how they are compensated. The IR professional typically has a small window

of opportunity to deliver the company story, and that story must appeal

immediately to the analyst as a stock picker. The profile of the company

should also be attractive in terms of potential investment banking and trading

fees, but that shouldn’t be the analyst’s concern given the new regulatory

environment. That said, all analysts can quickly determine if a company fits

the overall philosophy and focus of their sell-side employer.

THE SELL-SIDE/BUY-SIDE RELATIONSHIP

The buy-side, both institutional and retail (individual investors), execute

their investments through the sell-side. They rely on the brokers and traders

to execute their orders in a timely and reliable fashion, a relationship that is

integral to the capital markets.

Buy-side investors also rely on the research analyst’s narrow focus.

While a sell-side analyst might cover 15 or 20 companies, his or her counterpart

on the buy-side may own 50 or 100. Because the sell-side is insinuated

into every aspect of an industry, the buy-side relies on them for market

intelligence, industry information and opinions, as well as access to companies

and management.

EQUITY RESEARCH

Equity research was created after the sleepy stock market days of the 1930s

and 1940s, when investors were still a bit market-shy from the 1929 crash.

Broker Charles E. Merrill and his firm Merrill Lynch wanted to bring the information

to average American families. He thought research papers with

in-depth information and recommendations on certain companies and industries

would ease avenues of access to what had once been the domain of

the wealthy or speculative few.

As more investors entered the market, firms continued to provide research

to their sales and trading clients for a fee, but it was also a customer service offering for investors who did their business with, and provided trading

commissions to, that firm. Eventually, analysts became known for their

expertise and pulled investors and companies to the firm for trading and investment

banking business.

Equity research provides in-depth analyses of companies, as well as

overviews of the industries in which those companies compete. The analyst’s

objective is to do a complete analysis of a company in order to estimate its

value relative to the current stock price and then make an “actionable” recommendation

to investors. These recommendations are bannered at the top

of all research reports and differ from firm to firm. Generally, however, there

are different scales of recommendations, including Strong Buy, Hold, and

Sell. In reality, there are many other ratings, including Buy, Outperform,

Long-Term Buy, Moderate Buy, and Accumulate. These, unfortunately, can

be the equivalent of either Hold or even Sell recommendations and are designed

not to offend management teams, thereby preserving access, the

lifeblood of an analyst. Without these ratings, management would certainly

be bothered or angry (Sell recommendations in writing don’t sit well with

CEOs), and an analyst might be cut off from access and ultimately the

ability to do his job. Underperform, Moderate Sell, Sell, and Strong Sell

are truthful recommendations and analysts who utilize these ratings, although

very rare, are real stock pickers. Table 2.1 shows the anatomy of a

research report.

The IR aspiration of getting a company noticed and creating interest in

the stock is best met through the analysts and their research reports, which

is called coverage. Unless a company is fairly substantial, with a market cap

over $100 to $200 million, getting coverage can be a battle. IR that understands

how an investment bank works and can establish a relationship with

an analyst is best positioned to get coverage.

The first step is to get on an analyst’s radar. Analysts pride themselves

on the depth and range of their industry expertise, and with shrinking staffs,

many analysts don’t have time to learn every fact. IR can make analysts

smart by delivering timely and incrementally valuable information about the

company or the industry. Even if that analyst doesn’t write a research report

on the company, an information-sharing relationship might result in a mention

in an industry report.

In pursuit of a voice, private companies should also think about targeting

the analysts. Much of the media exposure on private and public companies

includes an analyst quote because analysts are seen as highly credible,

third-party validators. As the analyst works to paint a comprehensive picture

of the industry, the private company must convince the analyst that any

portrait without them is incomplete.

ECONOMIC EVENTS

IR should help the analysts plant the seed for trading commissions and

banking fees by creating economic events that generate these commissions

and fees and create paydays for the analysts and their investment banks.

There are numerous above-board ways for a company to facilitate economic

events that will continually reward analysts with well-thought-out research

coverage (not necessarily any particular rating), which is discussed in Chapter

24, “Meeting the Street.”

THE IR IMPERATIVE

Analysts, in order to do thoughtful analysis and judge stocks fairly, need the

right information, communicated clearly, from sources they trust as reliable.

Analysts sometimes find people who don’t really address what is needed.

Some executives just don’t have the time to share their story. Others don’t

know what analysts want or need. A few are worried about sharing information,

even positive information, that might be misunderstood or misrepresented.

Others have flaws in their strategy or operations and opt to keep

quiet until the problems are fixed. Many companies just aren’t aware of how

best to describe their businesses and strategies to The Street.

A company that is going to be public might as well be the best public

company it can be and do right by the shareholders. Unfortunately, in all

these cases, management isn’t necessarily doing what is in the best interest of

its shareholders, and that’s blatantly wrong.

The reason we came into IR as former analysts and buy-side professionals

was to mitigate the losses incurred in translation, to help companies tell

their story without being misunderstood or misrepresented, and to help analysts

get the best information they could for thoughtful and fair analysis.

IR’s mandate is to fully understand the sell-side in the broader context of its

employer, the investment bank, which is the best way to increase chances for

coverage. Without this information, companies that spend lots of time and

money approaching Wall Street analysts are probably wasting both.