Frank Quattrone made his fortune by taking Silicon Valley startups public during the dot-com boom. Even at the time many awkward questions were asked: weren’t most of these companies too small and too young and too unprofitable for a full-scale IPO? But Quattrone didn’t let those things stop him.
How did Quattrone overcome these real and sensible worries of investors? Partly by being in the right place at the right time: technology stocks were soaring, investors in them were making millions of dollars, and everybody wanted in on hot IPOs which were pretty much guaranteed to be flippable at a huge profit on the day the stock went public. But Quattrone had another, fallback position, too: don’t worry, I can assure you that these are eminently respectable companies, just look at the analyst coverage that they have.
Today, Quattrone misses those days.
“I do think the industry should petition to remove the Spitzer initiatives because ultimately they hurt the competitiveness of our country by denying small companies the access to research analysts,” he said…
Mr. Quattrone posits that the lack of research has been one reason the initial public offering market for technology companies has had a tough time.
Well, yes. But what Quattrone isn’t mentioning here is that the IPO market for technology companies has always been tough — with the single exception of one bubblicious period in the late 1990s. For pretty much the entire history of capital markets, a technology company wanting to go public has had to be reasonably big and show substantial annual profits more than once. Quattrone’s baseline is far removed from there, and he would love it if he could get analyst support for the smaller, less profitable companies that he wants to take public. He can’t, however, and so he’s whining.
The job of stock analysts is not to increase the number of technology companies going public before they’ve really proven themselves. Quattrone still doesn’t grok that analysts are meant to work for investors, not investment bankers. And in the much more sensible tech-stock environment of the 2000s, the biggest investors simply aren’t interested in small companies with smaller profits and free floats which are smaller still. They don’t "move the needle", as they say.
Such IPOs are good for giving the founders of the company in question massive paper wealth, and they’re very good for giving the likes of Frank Quattrone very real wealth. From an investment perspective, however, there’s no good reason for the big sell-side research departments to put a large amount of human capital to work covering these small and marginal and speculative stocks.
Quattrone wants his free lunch back? Well, he’s not going to get it. No matter how much he kvetches to Andrew Ross Sorkin.