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Chapter 4. Analysis Tool #1: Analyzing A... > “Sell” Is a Four-Letter Word

“Sell” Is a Four-Letter Word

Sell-side analysts are real people like you and me who happen to have very well-paying jobs. You can't blame them for wanting to hold onto those jobs. Their employers, mostly brokerages, derive much of their profits from investment banking, that is, working with companies when they issue more stock, make acquisitions, borrow money, and so forth. How much money is involved? Say an investment banker brings a new company public by underwriting its IPO. The underwriting fee is negotiable of course, but think 7 percent. So a deal is worth 7 percent of $150 million, or $10.5 million, if the new company issues 10 million shares at an initial offering price of $15. When one company acquires another, both firms hire investment bankers to advise them on the transaction, involving fees running into tens of millions of dollars.

With that much money involved, the competition among investment banks to land these juicy contracts is intense. Naturally, the client, say a new company going public, picks the bank it believes will do the best job, meaning the one that will get the most shares sold at the highest price, and equally important, keep the share price up after the IPO. The latter is important because company insiders personally own tons of shares they will eventually want to sell. That's where the analyst comes into the picture. A highly regarded analyst's strong buy recommendation can make a big difference in a stock's trading price. According to a January 29, 2001, Wall Street Journal story, analysts receive “bonuses of several hundred thousand dollars for helping their firms win big underwriting deals.” You can connect the remaining dots on your own.


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