Another Interesting JBLU article
UBS Warburg Makes History with JetBlue
Sun May 12, 5:29 PM ET
By Per Jebsen
NEW YORK (Reuters) - UBS Warburg made history earlier this week: It publicly told investors to sell shares of a company it just had helped bring public.
UBS Warburg analyst Samuel Buttrick last Tuesday initiated coverage of discount airline JetBlue Airways Corp. as "reduce" -- UBS's second-lowest rating. Buttrick, who was not available for comment, also put a price target of $38 on JetBlue's shares, or 30 percent below what it was when he issued his report.
Experts could not recall the last time an investment bank that helped underwrite an initial public offering (IPO) came out so soon afterward with a recommendation for investors to unload it. JetBlue began trading on April 12.
"Finally, there is some honesty in terms of saying it's a great company, but it's overvalued," said Jay Ritter, a finance professor and IPO specialist at the University of Florida.
Buttrick's move stands out because an upbeat post-IPO analyst recommendation has long been considered to be a necessary part of the package offered by banks competing for underwriting business. UBS has made an aggressive bid this year for a bigger stake in the U.S. IPO market.
The bank has landed the lead bookrunning role for five IPOs this year, behind only Salomon Smith Barney in number.
The deals have had mixed success: Pharmaceuticals Inc. , software maker PrintCafe Inc. , and Mexican cable provider Cablevision SA were postponed for lack of demand. UBS-led IPOs by drugmaker Ribapharm Inc. and Brazilian (news - web sites) water firm Sabesp priced below expectations.
IPOs slated for this week include retailer Aeropostale Inc. , managed by Bear Stearns , and surveillance software maker Verint Systems Inc., managed by Lehman Brothers . Both are expected to be priced on Wednesday.
Global Preferred Holdings Inc. , a reinsurer, is expected to price on Tuesday in a sale led by William Blair. Kyphon Inc. , which makes medical instruments for spinal care, is expected to price on Wednesday, with USB Piper Jaffray as lead. Innovative Drug Delivery Systems Inc. , managed by Thomas Weisel, is listed as day-to-day.
REVOLUTIONARY
Buttrick's advice would have been noteworthy enough as just 2.5 percent of stock recommendations are equal to sell or strong sell, according to Thomson Financial/First Call. But by Wall Street standards it was extraordinary because UBS Warburg had served on the underwriting syndicate for JetBlue's much-anticipated IPO.
Buttrick praised JetBlue's business prospects, noting that the company has "lots of money, a strong management team, and a very big market." Yet he said that the New York-based airline's shares, having doubled from their IPO price, had risen too far. The 2-year old company's market capitalization had grown to be bigger than that of Northwest Airlines (news - web sites) or Continental Airlines (news - web sites) , he noted.
"(That) is something during the whole TMT bubble, analysts should have been saying," Ritter said. "I think the fact that the heat is on analysts is probably why we're seeing this now and we didn't see it during 1999."
Shares of TMT -- tech-media-telecom -- companies were bid sky-high with help from bullish analysts during the late 1990s boom, then plunged in the two-year bear market.
NO 'SELLS'
According to a sample of 1,611 IPOs between 1996 and 2000, not a single Wall Street analyst put out a "sell" where that analyst's employer participated in the underwriting syndicate, Ritter said. A precise tally is difficult because stock rating systems differ, he cautioned.
Data from StarMine, which tracks analyst picks, helps to confirm Ritter's observation. No lead underwriter issued a sell on a recent IPO between 1994 and August 2000, and there were just eight "hold" ratings, the San Francisco company said.
Wall Street's mentality: "If you can't say something good, don't say it at all, just like mother told you," Ritter said.
Analysts who report on an IPO are often the same analysts who help orchestrate it -- for instance, by answering questions during pre-IPO pitches to money managers. Then, like clockwork, when the securities-law "quiet period" expires, these analysts typically release glowing reports on the company's prospects.
This collaboration helps investment banks sell their IPO skills to prospective IPO candidates and illustrates why investment banks would not wish to alienate potential clients.
"Since (JetBlue) might do future underwriting or M&A (mergers (news - web sites) and acquisitions) business, putting out a negative recommendation hurts UBS Warburg's chances of getting that mandate," Ritter said.
HARSH SCRUTINY
Now, however, cozy cooperation between bankers and analysts is under scrutiny as never before.
State securities regulators, spearheaded by New York State Attorney General Eliot Spitzer, have launched probes into whether analysts produced tainted research to win banking business. The Securities and Exchange Commission (news - web sites), which has also begun an investigation, on Wednesday adopted new disclosure and other rules for analysts that among other things expand the IPO quiet period to 40 days from 25 days. Critics have charged these rules do not go far enough, and the SEC has said it may beef up the regulations.
Soured public opinion has spurred analysts to show they care about traditions of objectivity and independence. In March, Morgan Stanley unveiled a new approach, giving 22 percent of North American stocks it covers its lowest rating.
"The brouhaha about analyst practices has made analysts more aware of not wanting to be seen as hyping stocks," said Mitch Zacks, director of research at Zacks Investment Research. "They're reacting ... to the pendulum swinging to the opposite direction."
Surprisingly, the most notable previous instance of a high-profile IPO receiving lukewarm ratings was top-tier investment firm Goldman Sachs Group , Ritter said. Goldman rivals such as Bear Stearns, Merrill Lynch, Morgan Stanley, and Salomon Smith Barney -- who had been included in the syndicate for Goldman's May 1999 IPO -- gave Goldman shares a "neutral" rating when the quiet period ended.
Such brutal honesty about their competitor proved less well-founded than the myriad "buys" issued to tech companies going public, Ritter said. Goldman shares since then have beaten the Standard & Poor's 500 Index <.SPX>, and proven a far safer bet than the tech-laden Nasdaq Composite Index <.IXIC>.
--With reporting by Jake Keaveny
