Not "Loco" For Research and Banking Walls

It's not every day that a vendor or service provider in the procurement and supply chain world has what it takes to seriously consider a public offering. But I've heard it from a number of sources that Emptoris, one of the real leaders in the sector from a growth and technology perspective, is getting closer to filing its S/1. In the past month, there have been a number of rumors flying that Emptoris has been aggressively shopping the deal and evaluating various banks to see not only how they would price the offering, but also what kind of coverage and support banks have for the sector in general. I also contacted Emptoris to see if they would comment on these rumors, and I quickly received back a "no comment" response, as I would expect if the above is true.

As a close watcher of this space, I'm thrilled that a potential Emptoris IPO is inching closer. It's validation for the entire market that the Spend Management sector is growing and that there are a number of players -- many of them private -- that are quietly thriving. Let's hope that the capital market conditions hold out and that there's enough appetite in the investment community for a new technology offering.

There is, however, a little side note in all of this which could prove as interesting (and related) in the short-term as the more important -- and good -- news of a possible Emptoris IPO. And that is a new research note that WR Hambrecht -- a firm rumored to be in the running as one of the bankers on the deal -- recently issued on Ariba earlier this week, initiating coverage of the stock with a "hold" rating. The title of the report is "Not Loco For Ariba". Now, ratings and titles themselves are unremarkable. And heck, if I was on the sell-side, I could easily come up with a rationale for slapping on a "hold" rating on Ariba just as much as I could a "buy" or "sell" rating.

But this report completely skims the surface of the sector and gets a number of things plain wrong. It feels like it was rushed together in a matter of hours. For example, it mistakenly lumps in Ariba as a Web 2.0 player as a "positive" (which, unfortunately, unlike Rearden Commerce, it certainly is not). If the authors of the report, Robert Stimson and Jason Ko, had done any serious homework, they would have figured this out. From a grammatical and sentence construction perspective, the report also feels rushed. If it had gone through proper proofing, any editor would have picked up that they start two sentences in the initial two paragraphs with "That said ..."

Given these red flags, after I read the report, I contacted Ariba and another major vendor in the sector to see if the research analysts who put their name on it decided to contact the players that they were covering. I spoke to an Ariba spokesman who said, to the best of their knowledge, the analysts did not speak to anyone at Ariba (the same was true of another vendor in the sector whom any analyst should have talked to as part of their due diligence on Ariba). After this, I spoke to some folks on both the buy- and sell-sides of the banking world -- in addition to an IR practitioner -- who said that is standard practice to contact a company that you're initiating coverage on.

What's the upshot, you ask? As an outsider looking in, it feels like a banker's tail might be wagging the research dog. It would seem plausible to me that this report was slopped together in a matter of hours to show a potential IPO prospect, Emptoris, that the bank was serious about the sector and that indeed they were "not loco for Ariba". But since neither author of the report will return my phone calls and voicemails, I'm not sure what to believe.

So where does this leave us? Just as we all used to discount Aberdeen whitepapers back in the day given the method in which the firm was remunerated for writing them, I believe that there might be reason to question the financial motivations of research analysts on the sell-side as well -- not to mention the so called "wall" between research and investment banking. After all, the more things change, the more they ...

Jason Busch

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