AppId is over the quota
AppId is over the quota
By Nishant Kumar and Vikram Subhedar
HONG KONG | Thu Oct 27, 2011 9:28am BST
HONG KONG (Reuters) - Just when clients needed them most, at least eight brokerage research analysts covering Olympus suspended their ratings of the Japanese firm, leaving investors in the dark on whether to buy, sell or hold.
While some analysts tried to offer a view on what was happening several days after Olympus Corp (7733.T) stunned the market by sacking its CEO, at least five banks issued just one paragraph reports -- in one case a single sentence -- saying they could no longer make a recommendation.
CEO Michael Woodford said he was fired for questioning a $687 million advisory fee linked to a $2.2 billion takeover in 2008 as well as other deals he says have destroyed $1.3 billion of shareholder value at the camera and endoscope maker.
"I am not arguing with the previous call any analyst had had on the stock. Things like fraud and malfeasance are notoriously difficult to predict," said a fund manager who tracks Olympus and pays fees to some of the research firms covering it.
"I am saying the analysts have just been allowed to say, 'there is uncertainty, so we can't rate it'. It's outrageous," said the manager. To avoid creating tensions with the brokerage analysts he deals with, he did not want to be identified.
Indeed, in the immediate aftermath of one of corporate Japan's biggest scandals, most of "The Street" stepped aside rather than issue research on how to make sense of the saga or investment recommendations.
The scandal has wiped out more than half of Olympus's market value, attracted the attention of the U.S. Federal Bureau of Investigation and cast a dark shadow on Japan Inc's corporate governance and corporate culture. Olympus has denied any wrongdoing.
Olympus shares went into freefall after the dismissal of Woodford and his disclosure of the $687 million excessive advisory fee.
At that point, eight banks suspended ratings on the stock, citing uncertainty and a lack of clarity. One of them, Goldman Sachs (GS.N), said the circumstances made it difficult to do accurate analysis.
"INCREDIBLE"
The spate of suspensions by analysts who covered Olympus highlights several issues, one tied generally to the research industry, another to Japan's deferential corporate culture.
On the first issue, the suspensions touched on a topic often debated in the world of so-called "sell-side" research; analysts are reluctant to put "sell" ratings on stocks and instead issue "holds" because a sell rating limits access to top management at the company being covered or because it creates tension with the bank's other units trying to sell products to the company.
The second issue is, some critics say, endemic to Japan's corporate culture; deference and respect toward top executives, which often lead analysts and other professionals tasked with investigating to pull punches on tough questions.
"A good analyst whose sole job is to dig deep into a company's filings and find anomalies would have been all over this years ago," said David Baran, co-founder of Tokyo-based hedge fund, Symphony Financial Partners.
"It's incredible that a company as broadly covered as Olympus would have not been grilled over this."
In fact, research analysts were not alone in taking a step back when the scandal hit. Japanese media, regulators and politicians were reticent as well, even when it became clear Olympus paid more than 30 times the normal advisory fee for the acquisition of British medical equipment firm Gyrus in 2008.
Thomson Reuters data shows that the fee is the largest in M&A history.
Analysts in the United States and Europe are hardly immune from making a wrong or wimpy call on a company, but they have shown an aggressive side.
Meredith Whitney publicly lambasted banks on several matters prior to the financial crisis, including their relationship with ratings agencies. She was with Oppenheimer & Co. at the time.
Mike Mayo had a well-known, public row with Citigroup over his criticism of the bank around the time of the crisis. He was with Deutsche Bank at the time.
Though analysts in other parts of the world might take a tougher line on a company, they are all prone to the same issues. Before struggling U.S. video distributor Netflix recently plunged 40 percent, only one analyst had a sell rating.
SUSPENDED
Investors such as mutual funds and hedge funds pay fees to brokerages that supply research on companies and a rating on their securities, such as whether to buy, hold or sell. To suspend, means an analyst has no rating to give.
Goldman Sachs and JPMorgan Chase & Co (JPM.N), the top-two most accurate forecasters of Olympus earnings tracked by Thomson Reuters StarMine, were among the banks to suspend ratings -- Goldman being the first.
When the scandal broke, Goldman downgraded Olympus to neutral from buy and removed it from its conviction buy list.
Goldman suspended its Olympus rating on October 19, along with BNP Paribas SA (BNPP.PA). Goldman later issued a detailed report on what a possible delisting might mean but has stopped short of issuing a rating.
"We suspended our rating on Olympus as increased uncertainty around past acquisitions and accounting practices make it difficult to do accurate analysis of rating and earnings estimate of the company," a Tokyo-based spokeswoman for Goldman Sachs said in an email to Reuters.
Morgan Stanley (MS.N), Nomura Holdings (8604.T), Macquarie (MQG.AX), Citigroup (C.N) and Deutsche Bank (DBKGn.DE) also suspended their ratings. Bank of America Corp (BAC.N) said it was changing its rating from neutral to "under review".
CLSA, an independent broker that specialises in Asia, maintained a "sell" rating. Barclays (BARC.L) has maintained a rating.
Apart from Nomura, two other large Japanese brokerages Daiwa Securities (8601.T) and Mizuho Securities (8606.D) have maintained a "neutral" and "underperform" rating, respectively. Their latest recommendation was on Oct 18.
The fund manager said the massive trading in Olympus made it the most commercially opportune time for analysts to write about the company.
"There are more people reading anything to do with Olympus now than ever before in the sum total of the company. And you suspend?" the manager said.
(Written by Michael Flaherty, Editing by Dean Yates and Neil Fullick)
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