Research on Newly Public Net Firms Is Slow in Coming

Underwriters for Internet companies are basically the only ones covering them.
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Wit Capital

made some

news last week when it published its first research report and issued a buy rating on

priceline.com

(PCLN)

. The inaugural report was not only a milestone for Wit, an online investment bank, but also something of a rare occurrence on Wall Street this year.

Wit diverged from an emerging pattern of brokerage firms covering only the Internet IPOs they bring public and leaving the rest generally unfettered by objective analysis. Wit had no part in the priceline IPO.

Anecdotal evidence shows that as recently as last year, Wall Street firms are less willing to start research coverage of newly public Net companies, except when they're a top underwriter.

The possible reasons for this development vary. For one thing, the Internet sector is filled with companies with short and unprofitable track records, making it tough for analysts to devise projections. So some analysts may just decide to take a pass. Then there's the fact that so many Internet companies are coming public, a burden to some analysts who already follow a host of companies. In addition, many Internet companies have been public only a short while, and it often takes some time after an IPO for analysts to pick up coverage. Amid all this, investment banks strongly encourage analysts to pick up coverage of the companies banks underwrite.

In eight recent Internet IPOs handled by large Wall Street firms, as many as four separate firms provided research on each of the companies, according to

Zacks Research Service

. However, only two of the companies, including priceline.com, were covered by analysts at firms not directly involved in their offerings.

"What you have to look at is who is picking up coverage of these stocks, and it's usually just the investment banks that managed or co-managed the deal," says Scott Sipprelle, co-founder of

Midtown Research

, an independent research firm that specializes in IPOs.

Source: Zacks Research Service

The pattern among Wall Street firms in providing research coverage of new IPOs, especially in the Internet sector, is simply to take care of their own, Sipprelle says. "No one is picking up research on a company just to round out their portfolio or because they think the company has quality fundamentals."

An informal canvassing of the research coverage of some of the top Internet companies supports that view.

uBid

(UBID)

, for example, went public in December and has just one research analyst covering it --

Merrill Lynch

(MER)

, its lead underwriter. And despite its high-flying status,

theglobe.com

(TGLO)

, which went public in November, has only two analysts covering it,

Bear Stearns

(BSC)

, the lead underwriter, and

Volpe Brown

, the co-manager.

In some cases, however, the famous names in the Internet crowd did merit independent research. For example,

Lycos

(LCOS)

has 17 analysts following it, including several that had nothing to do with its 1996 IPO.

Yahoo!

(YHOO)

has 24 analysts, including numerous others than its underwriting team. But these companies are more established with longer track records compared with many Internet offerings.

Meanwhile, a random look at a dozen research reports on four non-Internet companies that went public in February offers evidence that analysts are quicker to pick up coverage of a company that actually has historic financials to analyze.

Five of the 12 research reports (42%) on the companies were from Wall Street firms that were not involved with the companies' underwriting.

Del Monte Foods

(DLM)

, for example, is covered by six analysts, only two of whom work for the underwriters. Since the company's Feb. 5 IPO, Merrill,

Goldman Sachs

,

Credit Suisse First Boston

and

NationsBanc Montgomery Securities

all have picked up coverage. The company's lead underwriter, Morgan Stanley, and co-manager, Bear Stearns, also are covering the firm.

Timing may be a factor. Generally, most companies -- Net stocks or otherwise -- don't get picked up by other banks for about six months after their IPO, says Kathleen Smith, portfolio manager for

Renaissance Capital's

(IPOSX)

IPO Aftermarket fund.

But even then, a third-party investment bank often won't get involved with a company unless it can see a future investment banking role ahead, or if the bank's institutional clients are clamoring for coverage. "Once the initial investment banking is done

via the IPO, there really is no incentive for the bank to pick up coverage if it wasn't involved," she adds.

Adding to the problem is the growing number of companies going public, according to Sandy Robertson, former head of

Robertson Stephens

(now

BancBoston Roberston Stephens

). Between 1989 and 1991, an average 250 companies went public each year. Six years later, from 1995 to 1997 that average almost tripled to 694, according to

Securities Data

. An analyst can only properly cover between 15 and 20 stocks at any one time, Robertson says.

"There has been a flood of new companies, and there is only so much bandwidth an analyst has," says Phil Leigh, who heads Internet research at St. Petersburg, Fla.-based

Raymond James

. And analysts often have little choice but to cover the companies their firm is doing business for, and maybe some of the bigger names if they can, Leigh says.

Raymond James has published research on some Internet companies for which it didn't do underwriting. For example, it was the first nonunderwriting team firm to put out a report on

E*Trade

(EGRP)

. It did so in February 1997, about six months after the online brokerage's IPO. But analysts have to have good reasons, such as spotting an investment angle first, to pick up coverage on companies with no underwriting ties, says Leigh.

Many Internet companies, meanwhile, wouldn't mind a little more exposure.

"We're absolutely looking for more research coverage," says Joni Hanson, director of investor relations at

InfoSpace

(INSP) - Get Report

. "But we're a young company and it takes time to establish these relationships." InfoSpace, which held its IPO in December, is followed by just two firms, its lead and co-managers on its IPO,

Hambrecht & Quist

(HQ)

and

Dain Rauscher

(DRC)

, respectively. The company is working with two analysts from firms that were not among its IPO underwriters, Hanson says.

The slowness of analysts to pick up Net companies may be a phenomenon unique to the sector, she says. "It takes a while for Internet companies to build up their business models and for analysts to become comfortable with them."