Budding technology companies probably don't enjoy this scenario very much.
Unfortunately for their Wall Street aspirations, they can't do much about consolidation in the investment banking and brokerage industry. That story began its latest chapter today, with UBS announcing plans to buy PaineWebber Group (NYSE: PWJ).
Mergers are happening in the financial realm for the same reason they're happening in almost every industry: scale.
Nationalists of every stripe hate the idea of One World, but that's the reality of business these days. And if you want to play the world, you've got to be large.It makes sense for the companies merging, and may (I say may) even be good for the bank's current clients.
But potential clients have nothing to cheer. After all, consolidation results in fewer banks to play off one another for business. And more important to individual investors, there's another venue that takes a hit whenever investment banks get together: research.
These mergers -- and their inevitable blending of brokerage research teams -- have been going on concurrently with the explosion of new technology companies on the stock market. The recent IPO slowdown notwithstanding, hundreds of technology and Internet firms have gone public in the last 12 months.
You need analyst coverage to stand out from the glut. Self-styled trading hotshots often deride the value of traditional analysis, but like it or not, analysts at well-known Wall Street firms can move stocks. Analysts advise fund managers and guide their brokerage sales forces. And of course, those notorious research reports can induce convulsions throughout the market ranks.
Deutsche Banc.Alex Brown's Andrea Williams Rice steps back from her previously unabashed bullishness and Yahoo! (Nasdaq: YHOO) reels. Salomon Smith Barney's Jonathan Joseph sounds a warning bell two to three quarters ahead of schedule and chipmakers deflate.
Incidentally, those two analysts' employers provide examples of consolidated research teams. Among more recent examples, Prudential Securities bought Volpe Brown Whelan and created the Prudential Volpe Technology Group. UBS a couple of years ago bought Warburg Dillon Read and fashioned it into UBS Warburg. Wit Soundview (Nasdaq: WITC) -- itself the product of a merger not so long ago -- has a pending deal to assimilate the E*Offering unit of E*Trade Group (Nasdaq: EGRP). Merrill Lynch (NYSE: MER) stock has risen in the last few meeks on M&A rumors.
It's like watching Borg cubes in action: uniqueness was added to the Collective; resistance was futile.
As are the struggles of many tech, communications and Internet firms looking for attention. A shrinking pool of analysts can't possibly keep up with the growing ranks of corporate newbies. These days, client service (read: making the IPOs look good) can bury a major analyst up to his or her wireless phone headset.
You're also seeing large, established companies like AT&T (NYSE: T) are pounding Wall Street doors these days, in an attempt to boost their own faltering stock prices. And if they're not, then their shareholders are demanding it. Nowadays I hear it at shareholder meetings and read it on message boards all the time: why can't we get analysts to pay attention to us?
I wish there were enough research bodies to go around, if only for the selfish reason that it gives me another source to call. It's also more than a little ridiculous to write a news article that quotes a First Call "consensus" consisting of one or two analysts.
Not that being ridiculous has ever deterred journalists.
In the meantime, it doesn't hurt to hope your favorite New Idea Company gets quality time with analysts. But don't keep your hopes too high -- with a shrinking base to woo, newbies will be lucky to get the time of day. 22GO>