VideoReceived wisdom tells us that the separation of investment banking and equity research will hit small-cap stocks the hardest. Wall Street banks will no longer bother to research these firms, now that the implicit link between positive research and valuable corporate-finance mandates has been broken. The reality is starker: companies with revenues of less than $100 million have little to lose because so few are researched even now.
"Consolidation in the [banking] industry meant that small companies like ours lost their coverage a long time ago," says Barbara Remley, CFO of Nasdaq Small Caplisted software provider MakeMusic Inc. Remley garners research from specialty investment adviser BlueFire Research Inc., but otherwise finds it difficult to get coverage. "You can't get investors interested unless you are proven, so there is little or no trading activity. But you can't get the activity without the coverage," she says.
Richard Kelecy, CFO of waste-management company Perma-Fix Environmental Services Inc., agrees that attention from Wall Street analysts has been scarce for years: "It's tough to get the big boys interested. They don't cover anyone with stock trading at less that $5." His company's stock has traded at between $2.50 and $2.70 in recent months.
This latest cutback in coverage could end the use of public equity markets as businesses' preferred funding source. "If I were planning an IPO," says Kelecy, "I would seriously consider whether it was cost-effective to go public." The more-detailed documentation that is required once a company is listed used to be worth the effort: the payoff was greater liquidity and access to funds. With the equity markets all but closed to new issues, that is no longer the case, he says.
Even for listed companies, the public equity markets may no longer be a viable financing source. "[The decline in small-cap research] will stifle small companies," says Remley, who is planning a private placement to raise funds. "They'll have to seek alternative methods of financing if they want to pursue growth."
Tom Freeze, CFO of food producer Poore Brothers Inc., is more optimistic. "In the short term, there will be reduced coverage of small-cap stocks, but analysts will continue to look for good ideas among smaller companies." —Tabitha Neville
Help!
The Securities and Exchange Commission is looking for a few good men and women to help with an onslaught of work at the anemic regulatory agency.
Yet help is slow in coming. And if President Bush gets his wish, it won't get as much as it needs. According to the New York Times, the Bush Administration is looking to roll back part of the 77 percent budget increase that Congress approved for the SEC in July but has yet to appropriate. That has critics buzzing. "It's stunning that they would consider anything less than a fully funded SEC, given the current backdrop," says John Giesea, president of the Security Traders Association.
Certainly the SEC has no shortage of work. On top of a well-documented rise in investigations, it has been given the task of putting the Sarbanes-Oxley Act of 2002 into action. "The SEC is in a desperate situation in terms of having the people needed to do the job in a reasonable time frame," says Alan R. Bromberg, a professor at the Dedman School of Law at Southern Methodist University. He estimates the SEC needs to hire an additional 200 to 400 staffers. But rather than add staff, the agency has lost employees. "Salaries are miserably low," explains Bromberg. —Joseph McCafferty
In Search of Skeletons
How nervous is Corporate America these days? Ask Gordon Grand, who leads the financial officers practice at New York-based executive recruiter Russell Reynolds Associates Inc. For the first time in his career, he says, he's fielding lots of requests to arrange in-depth background checks of CFO candidates.
Pinkerton's Inc., Kroll Inc., and other firms that do such checks say at least half of their referrals come from executive recruiters — and business is up. "We have seen an uptick in the CFO line," says Peter Turecek, a Kroll managing director.
Companies are going the gumshoe route not only because some CFOs have been accused of fraud, but because some weren't even who they were supposed to be. Veritas Software Corp.'s CFO, Kenneth Lonchar, for example, resigned in October after admitting he had lied about having an MBA.
Educational records, says David Grossman, man-aging director at Pinkerton's due-diligence unit, are a standard part of checks that dig far deeper, even looking at sex-offender databases.
Do CFOs really need to be checked for sex crimes? "We recommend it," states Grossman, an ex-FBI agent. "The CFO is often a public face of the company."
Background checks would have turned up Lonchar's phony MBA, but can they screen out a potential Andrew Fastow or Scott Sullivan? That's where "developed references" come in, says Grossman. References supplied by candidates are used as a starting point to identify a broader pool of people for questioning. "The most-thorough checks include reputational inquiries," adds Turecek. Barry J. Nadell, president of Chatsworth, Calif.-based InfoLink Screening Services Inc., says such checks of one CFO candidate turned up evidence of embezzlement from a previous employer.
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