The Flight of the Sell-Side Analyst

Indeed, the focus seems to be shifting already. Multibillion-dollar behemoths like Comcast Corp., Texas Instruments, and BellSouth Corp., for instance, have dramatically increased coverage since 2002, according to Reuters Research. Each of those companies added 11 new analysts over the period, giving each one the coverage of more than 30 analysts.

For the companies who end up losing what increasingly seems like a zero-sum game, however, the consequences can be severe. Sell-side analysts can provide a smooth passage for a company into the capital markets, supplying an imprimatur for investors seeking guidance about which shares to stock up on. Further, many analysts are aggressive matchmakers, introducing institutional investors to the companies they cover.

Witness the good meeting that analysts have given to FuelCell Energy Inc., a $780 million alternative-energy company based in Danbury, Connecticut. Investor-relations director Steve Eschbach says executives met with more than 65 potential investors during 2003, and equity analysts arranged half of the introductions.

Further, sell-side research can present company deficiencies within a larger company or industry scope. "Sell-side analysts put the bad news in context," says Nolop of Pitney Bowes, noting that most CFOs appreciate that kind of help when investors are skeptical about management's perspective.

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Still, even with all the help analysts can provide to public-company finance chiefs, it's possible to do more with less. That's what executives at FuelCell Energy found when analysts started beating a path away from the company.

Since 2001, 11 of 18 analysts have walked away from the company's stock, leaving the company with a respectable, if dwindling, analyst base of 7. While Eschbach agrees that losing coverage can stifle a company's access to the capital markets, he thinks that quality can trump quantity. The remaining analysts are "very diligent" about arranging investor introductions, he adds.

Nevertheless, the company launched an investor-outreach program on its own to make up for lost coverage. In late 2002, management called in Rivel Research to help ferret out potential investors. The Westport, Connecticut-based researcher identified 24 or so funds that had a keen interest in financing alternative-fuel technology. Eschbach says that the outreach campaign yielded at least one new investor.

Since the drop in coverage, which the investor-relations director attributes to Wall Street's disenchantment with the alternative-energy market, FuelCell Energy also has boosted its in-house peer-analysis efforts. For his part, Eschbach concentrates on identifying new investors, while the company's CEO and finance chief focus on holding on to existing shareholders.

Investor-relations consultant Ausnit views the drop in coverage as a chance to convince his clients — which include Pitney Bowes, Electronic Data Systems Corp., and MacroMedia Inc. — that it's possible to bypass analysts and go straight to investors. One good way to grab an investor's attention is to assign the CFO to lead capital-raising efforts, he says. In that way, the finance chief can cultivate strong, direct relationships with institutional investors.

Not everyone agrees that going direct via the CFO is such a hot idea, however. Most top finance executives don't have the requisite investment-banking background to raise capital in the public markets, contends B.J. Rone, a former finance chief of the semiconductor unit at Texas Instruments Inc.

Instead, Rone, now a principal with interim-CFO firm Tatum Partners, would rather see finance chiefs attend to strategic operations and corporate finance — and leave the capital-raising to Wall Street experts. "Very few CFOs are qualified to raise capital," he says.

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