Robert McCann resigned as head of research at Merrill Lynch yesterday – the latest analyst departure signalling a sea change on Wall Street.
At Merrill and other Wall Street powers such as Bear Stearns and Citigroup, established analysts are walking away from their posts as a new breed of research pro – ones with fewer ties to investment bankers and corporate clients – takes the lead.
Citigroup’s new head of research, Sallie Krawcheck, revamped her division’s management this week, as well, setting the tone for that firm’s push toward less-conflicted analysis.
As for Merrill, some sources on Wall Street see these moves as the first baby steps the firm is taking to slowly but surely unravel its research department in favor of buying unbiased study from existing, independent research firms such as Value Line, Sanford Bernstein, Instinet or Standard & Poor’s.
McCann, 44, took the job just months before New York Attorney General Eliot Spitzer began a probe into biased research issued by brokerages – resulting in a $1.4 billion global settlement paid by 10 big brokerages, including Merrill, which paid $200 million in fines and penalties.
Because of the probe, McCann’s job became different from the one he thought he’d accepted.
He presided over a change in how analysts are compensated, linking their pay to how their recommendations worked out for investors, instead of to any investment banking business they brought in. He also laid off a large number of analysts.
“Bob skillfully led the implementation of new policies aimed at reinforcing the independence and objectivity of the company’s research,” said Merrill Chairman David Komansky and CEO Stan O’Neal in a memo to employees yesterday.
McCann will be replaced by Candace Browning, currently head of U.S. stock research.
But analysts, disappointed in the new world order, are leaving Merrill and other investment banks.
In the last two weeks, Merrill banking analyst Judah Kraushaar and software analyst Chris Shilakes said they will leave the firm for greener pastures. In November, Merrill oil-services analyst Kevin Simpson left, and he has not yet been replaced.
Bear Stearns let go of 20 analysts last week, primarily in its technology and telecommunications groups.
Kraushaar, who plans to write a book, said he needs some time off and is not be opposed to returning to Merrill in six months or so – but not in a research role.
“We think there will always be a role for research conducted by the investment banks themselves, but also with room for additional information to be presented to investors from independent sources,” said Michael Privitera, a spokesman for Standard & Poor’s. “That’s ultimately more beneficial to investors, because the more information they have the better decisions they can make.”
Others may adopt the Citigroup model. That firm opted to build an equity research division completely separate from its investment banking and capital markets businesses.
But other firms may not go that route. Instead, it is believed they will buy unbiased research and simply slap their own names on it in what is called a “private-label” deal.