The Flight of the Sell-Side Analyst

Small-cap and mid-cap companies -- and some large companies, too -- are suffering through a drought of sell-side analyst coverage. The dearth is moving some executives to think about bypassing analysts altogether.

Investor Direct

Still, even with all the help analysts can provide to public-company finance chiefs, it’s possible to do more with less. That’s what executives at FuelCell Energy found when analysts started beating a path away from the company.

Since 2001, 11 of 18 analysts have walked away from the company’s stock, leaving the company with a respectable, if dwindling, analyst base of 7. While Eschbach agrees that losing coverage can stifle a company’s access to the capital markets, he thinks that quality can trump quantity. The remaining analysts are “very diligent” about arranging investor introductions, he adds.

Nevertheless, the company launched an investor-outreach program on its own to make up for lost coverage. In late 2002, management called in Rivel Research to help ferret out potential investors. The Westport, Connecticut-based researcher identified 24 or so funds that had a keen interest in financing alternative-fuel technology. Eschbach says that the outreach campaign yielded at least one new investor.

Since the drop in coverage, which the investor-relations director attributes to Wall Street’s disenchantment with the alternative-energy market, FuelCell Energy also has boosted its in-house peer-analysis efforts. For his part, Eschbach concentrates on identifying new investors, while the company’s CEO and finance chief focus on holding on to existing shareholders.

Investor-relations consultant Ausnit views the drop in coverage as a chance to convince his clients — which include Pitney Bowes, Electronic Data Systems Corp., and MacroMedia Inc. — that it’s possible to bypass analysts and go straight to investors. One good way to grab an investor’s attention is to assign the CFO to lead capital-raising efforts, he says. In that way, the finance chief can cultivate strong, direct relationships with institutional investors.

Not everyone agrees that going direct via the CFO is such a hot idea, however. Most top finance executives don’t have the requisite investment-banking background to raise capital in the public markets, contends B.J. Rone, a former finance chief of the semiconductor unit at Texas Instruments Inc.

Instead, Rone, now a principal with interim-CFO firm Tatum Partners, would rather see finance chiefs attend to strategic operations and corporate finance — and leave the capital-raising to Wall Street experts. “Very few CFOs are qualified to raise capital,” he says.


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