I’m told that it was a resourceful markets analyst at Salomon Smith Barney who, after a briefing by global information combine Reuters a fortnight ago, hired a dual-band mobile phone at the airport to inform his colleagues back in London about Reuters’ Internet strategy and its plans for its Instinet electronic broker.
The rest of the corps of analysts were apparently left staring dolefully at incompatible mobiles, looking for land-lines or, presumably, enjoying the hospitality of their airlines as they flogged back across the Atlantic to impart the Reuters news. But, however the Reuters news reached Britain, the effect was dramatic – some 15 per cent, or &£1.8bn, was knocked off the market capitalisation of the company the day after its briefing.
It was said after the meeting that Instinet had identified “clouds on the horizon” in the shape of competitive brokerage services that intensify pressure on Reuters’ margins in this field. In the lexicon of most analysts, this translated as a profits warning. Hence the slide in the share price.
But that’s not really the point. The linesmen’s flags shot up in the London market to indicate offside – Reuters, it was alleged, had been selectively briefing on price-sensitive information and an announcement should have been made to the London Stock Exchange. The LSE started an investigation.
Reuters took nearly a whole trading day to state that it had not divulged price-sensitive information, a delay that led most of us to presume that it hadn’t been sure. This could be overlooked if it was wholly uncharacteristic. Sadly, Reuters is gaining something of a reputation in this respect.
Last year, it kept its own counsel for a full three trading days when it was accused of industrial espionage on its rival, Bloomberg. Reuters was subsequently cleared of the allegation, but not before the damage had been done to its share price by sellers fearing the legal worst and with no reassurance offered from Reuters.
Reuters isn’t alone in ham-fistedly driving its own share price down. Last week, BT’s shares were the biggest one-day fallers, after what should have been a routine briefing for analysts. The telecoms group saw some &£3bn wiped off its market value – about five per cent of the total – even though it was insisting that it had divulged no price-sensitive information during the telephone briefings.
This claim is almost a contradiction in terms. If the share price turned out to be sensitive to the information, then it would seem to follow that it was price-sensitive information. Nevertheless, BT insisted that it had only said that it was trading in line with expectations for the full year. If that’s so, the only explanation must be that the stock market had gone bonkers.
Furthermore, magazine publisher EMAP knocked six per cent off its share price last week, when it revealed that it is to separate its Internet operations from the rest of its business, leaving analysts to downgrade profits forecasts. Unlike the Reuters and BT debacles, EMAP isn’t the subject of a Stock Exchange inquiry over share-dealings in the wake of its analysts’ briefing, but it serves to show just how potent a weapon is information in the hands of what Nigel Lawson memorably called “teenage scribblers”.
What else are we to conclude from these share-price dives? The first and most obvious point is that the cobbler’s children go barefoot. Reuters, BT and EMAP are all, in one form or another, in the business of communication. To varying degrees, none of them lately appear to have been any good at communicating information about themselves. As a global purveyor of others’ corporate information, Reuters is perhaps the most culpable in this regard.
Secondly, I’m pretty certain the LSE is fighting a losing and pointless battle over analysts’ briefings.
Insider dealing is one thing – the use of privileged, price-sensitive intelligence to deal in shares with the intention of making a profit at the market’s expense is a criminal act that carries a maximum jail sentence of seven years. But that’s not to say that company information doesn’t get to market at varying times. One can even make a case that an imbalance of information is what makes the market work. I look into a company’s affairs and learn that its prospects do not support its share-valuation. So I sell my interest to you, who do not have that information.
Of course, that information should be readily available to you in order that, in the hackneyed phraseology of the market, we operate on a level playing field. But I’m stumped by the challenge of identifying what analysts are doing if not being employed to find out information that other people don’t know, in order that their clients can make money.
Lastly, the volatility of the response to these analysts’ “sell” notes shows just how overvalued equity markets are at present, especially in the hubris-filled sectors of information technology and telecoms. They say that the US stock market could “correct” by as much as 40 per cent, dragging London prices down with it. The corrections to the valuations of Reuters, BT and EMAP could be just a small glimpse of what is to come.
When that happens, no amount of good communication will support valuations. But, as we’ve seen, good communication isn’t what these companies do.
George Pitcher is a partner of issue management consultancy Luther Pendragon