When the vote on the proposed merger of Hewlett-Packard Co. and Compaq Computer Corp. was still on the line, some big pension funds, money managers and many other investors anxiously awaited the financial analysis of one decidedly non-Wall Street organization - Institutional Shareholder Services Inc.
When ISS issued its opinion, the news was a big story on the network newscasts of Peter Jennings, Tom Brokaw, et al., and the next day in newspapers around the country. That publicity must have been the envy of Wall Street investment banks and their security analysts.
The impact of the ISS opinion was another sign, however tenuous, that Wall Street analysts' influence is waning, in part because of questions about the quality of the analysts' work and because of concerns about their perceived conflicts of interests.
In the H-P/Compaq vote, the influence of Wall Street analysis was replaced at many institutions by that of ISS, normally considered an adviser on matters of corporate governance, not the financial viability of mergers and acquisitions.
Patrick McGurn, vice president and director-corporate programs, acknowledged that dealing directly with a merger seems unusual for the corporate governance firm. However, he said the firm has been getting more involved in what appears more like the realm of financial analysis for the past 18 months, notably in the corporate fight between First Union Corp. and SunTrust Banks Inc. over the acquisition of Wachovia Corp. in 2001.
Now, the Investor Responsibility Research Center is considering whether to offer recommendations, not just provide research, on corporate governance issues. Its board could decide in the next three months. Among the issues it is considering are whether it can put together a staff with the competence that would be required to make recommendations, and whether it would come under fire for potential conflicts, rendering its objectivity questionable, according to Linda Crompton, chief executive officer and president.
IRRC wants to maintain the reputation is has developed for producing quality analysis of corporate governance issues, analysis that hasn't included any recommendations to clients, Ms. Crompton said. It provides executive compensation analysis to corporations.
IRRC would be a welcome competitor for the marketplace to the ISS monopoly on corporate governance recommendations, and possibly on the new financial analysis.
Making almost as big a news splash as the ISS opinion was the decision by William H. Gross, managing director, Pacific Investment Management Co., to publicly criticize General Electric Co. for its acquisition and financing strategy and to announce his firm would no longer own GE commercial paper over concern about risk.
PIMCO is in the business of investing on its opinions, not providing analysis for other investors. But the reception its views received shows a hunger in the marketplace for better investment advice. If possible, investors prefer advice from those without potential conflicts of interests.
Nell Minow, editor, The Corporate Library, a corporate watchdog resource, believes ISS has always been about shareholder valuation. Otherwise, she asked, "what's the point" of their recommendations? Ms. Minow noted she has a small interest in ISS.
That the firm's recommendation supporting the H-P/Compaq merger, which won in a preliminary vote count, may have swung the vote is a sign of its influence. The success of these new sources of financial analysis, like ISS and possibly IRRC, will depend not only on the quality and quantity of their recommendations, but also on the willingness of investors, especially institutional investors, to pay for the research.
Investors have favored Wall Street research so long, and still do, because the true cost of the research is hidden in other fees. So investors perceive it to be free.
In the long run, you tend to get what you pay for. Investors have to be willing to change their model of obtaining investment research if they want competitors to Wall Street analysts to thrive side by side in the marketplace. Otherwise, investors should stop complaining about Wall Street.
