Capital Markets

Trouble with Previews

The practice of putting out preliminary research reports has some investment banks pointing fingers.
Steve BergsmanSeptember 1, 1999

According to recent press reports, some investment banks have been previewing their analysts’ preliminary research reports to lure coveted prospective clients with the promise of a “buy” recommendation. But when asked about this questionable practice, most investment banks will admit only that the other guy does it.

A source at one major Wall Street investment bank, for example, says mainstream houses don’t preview reports; it’s mostly a practice at small firms. Not so, counters Andrew Scott, director of research at M.H. Meyerson & Co., a Jersey City, N.J., brokerage and investment bank. Scott claims previewing happens mostly with large companies, which his firm doesn’t even cover. “Our niche is microcaps and small caps with lower valuations,” he says. “We won’t even do a research report if management is incapable of executing its business goals.”

Why are investment bankers cagey about previewing research reports?

Such reports are supposed to be objective. If, however, they are being used as sales tools to attract clients, the analysis is tainted.

Despite reports of this dubious practice, a sampling of hot high-tech IPOs uncovered no examples of previews. Redback Networks Inc., for instance, went public in May. The Sunnyvale, Calif.- based provider of networking products chose Morgan Stanley Dean Witter as its underwriter, says Geoffrey Darby, the company’s CFO and vice president of finance. Although Darby admits the quality of their analysts was important in choosing Morgan Stanley, the deal was nevertheless “moving so quickly, we made our decision before any [preview analysis] came to us.”