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Paris — A new front has been opened in the luxury war —with the crosshairs trained on high-profile analysts.
This story first appeared in the November 27, 2002 issue of WWD. Subscribe Today.
Tensions among analysts reached a new zenith Tuesday with the disclosure that LVMH Moët Hennessy Louis Vuitton has sued Morgan Stanley, charging it with bias and alleging conflict of interest.
Morgan Stanley has close ties with LVMH’s arch-enemy Gucci Group, advising it on mergers and acquisitions. The suit, seeking $100 million in damages, also singles out its chief luxury goods analyst Claire Kent, claiming an anti-LVMH bias in her research and ratings.
“The relationship has always been tense between analysts and some companies, but now this is a war,” said one equity researcher who spoke on condition of anonymity. “It’s pretty sad. And if it happened once, it can happen again.”
The lawsuit certainly won’t foster an environment where analysts feel free to express their true opinions. Speaking only if they would not be named, several analysts told WWD they are already fearful of voicing negative views on stocks. They feel pressure mounting both from the investment banking operations of their home institutions and from the companies they cover — all against a backdrop of intensified corporate scrutiny in the wake of countless scandals and improprieties.
“In general, the atmosphere is incredibly hostile,” said one London-based analyst.
Luxury groups routinely discriminate against analysts who express negative opinions by snubbing them when it comes time to do investor road shows, which are scheduled encounters between company management and a bank’s clients meant to drum up investor interest. Fashion firms have also been known to blacklist analysts from their presentations and conference calls.
And there have been some bloodcurdling private admonishments and colorful public skirmishes between luxury firms and the analysts who cover them.
In January 2000, Gucci Group chairman Domenico De Sole lashed out against Lehman Bros.’ John Wakely, who questioned Gucci’s multibrand strategy and downgraded the stock.
Kent’s salvo earlier this month wasn’t likely to placate LVMH, Gucci or many other luxury firms. As reported, she and Mandy Deex cut sales and earnings estimates for the two luxury rivals as well as Bulgari, Hermès, Companie Financiere Richemont and Swatch, noting that the outlook for luxury firms appeared “considerably worse since the Bali tragedy, not better.” Only Burberry, a Morgan Stanley client but not a pure luxury issue, avoided the downgrade.
Defending Kent’s most recent downgrades, one U.S.-based analyst, who also spoke on condition of anonymity, said, “I think she was 100 percent right. She was negative on the group and, truthfully, the group has been a disaster. I believe they [LVMH] are using the relationship with Gucci and Morgan Stanley as an excuse.”
Gucci and LVMH have been turning up the heat on journalists, too. Tom Ford barred Le Monde fashion critic Laurence Benaim from his Gucci show last October because of an alleged anti-Ford bias, and LVMH chairman Bernard Arnault uninvited International Herald Tribune fashion editor Suzy Menkes to a Givenchy show last year when he took offense to one of her Christian Dior reviews.
But the LVMH lawsuit against Morgan Stanley is a lightning bolt for a long-simmering problem — and will no doubt further tighten the lips of many industry commentators.
“I find it a bit of a desperation move for LVMH to do that,” one analyst commented. “I don’t think it really helps LVMH’s reputation. [The company] can’t seem to let go of the problem it has with Gucci.”
The analyst was referring to the long-raging and acrimonious war between the groups, which stemmed from LVMH’s failed bid in 1999 to do a hostile takeover of Gucci.
Sources said LVMH’s suit charges Kent and Morgan Stanley of factual errors in its reporting of the French group’s financials and of distorting its performance and prospects. “[Kent] is consistently negative,” one source said. “She amplifies all the bad news about LVMH while downplaying the good news.”
The suit was quietly filed in Paris commercial court in recent weeks, but the public is privy only to any pending judgments. The first hearing is tentatively scheduled for Jan. 21.
Morgan Stanley issued a brief statement Tuesday defending the work of Kent and her team. “Morgan Stanley categorically rejects LVMH’s claim and stands by the integrity of its research,” the bank said. “Morgan Stanley intends to defend this suit vigorously.”
It is believed LVMH lawyers will present evidence suggesting Morgan Stanley favors clients its investment banking side advises, including Burberry, Bulgari and Gucci Group. The overall implication is that the investment banking side pressured its equity researchers to favor clients — and/or disadvantage their competitors.
The action adds more tension to an already nervous investment community in which analysts have seen their motives and recommendations questioned as a trickle of corporate corruption scandals has grown into a torrent. Most notably, New York State attorney general Eliot Spitzer has been investigating telecommunications analysts Jack Grubman of Salomon Smith Barney, who had continued to advise clients to buy WorldCom shares until a few days before accounting irregularities were disclosed at the now-bankrupt company. Salomon Smith Barney included WorldCom among its clients.
“It’s hunting season against the analysts. It is either Eliot Spitzer or the companies themselves,” said one analyst not affiliated with Morgan Stanley, adding that most analysts are simply looking to execute nothing more than “real good fundamental work.”
Members of the media have been holding their collective breath this week after the New York Stock Exchange proposed that analysts speaking with reporters about a company be required to disclose whether they own the stock or their firm has a business relationship with that firm. If the Securities and Exchange Commission were to approve the proposed guidelines, analysts would be expected to discontinue contact with any reporter who didn’t publish the information provided about these potential conflicts of interest.
Whatever the fate of the LVMH suit, it is clear that the days of laissez-faire investment research could be drawing to a close. Analysts polled Tuesday acknowledged the need to fortify the so-called “Chinese Wall” between research and banking functions.
“We need to separate equity research from the investment banking interests to eliminate the conflicts of interest that could force analysts to give positive ratings,” said one analyst at a Milan-based bank. “The things most at risk are the investment banking contracts.”
In a recent guest column in WWD, Peter J. Solomon, head of the investment bank that bears his name, suggested that investment research be pooled in much the same fashion as earnings estimates.
“To keep the banking fees rolling in, banks try to have a good relationship with these clients with positive research reports,” agreed another analyst who works for a Milan-based brokerage without investment banking interests.
On the investment side, LVMH is often advised by Goldman Sachs, but the list of banks it works with spans Credit Suisse, ABN Amro and others.
Meanwhile, the LVMH lawsuit is bound to stir wider debate about how luxury firms communicate with investors. European companies are notorious for their Byzantine reporting methods: often trumpeting impressive increases in profits, while burying exceptional items that cut into earnings.
Luxury analysts give mixed grades when assessing the openness of the companies they cover. Gucci, Swatch, Bulgari, Luxottica are generally described as communicative, while LVMH, Companie Financiere Richemont and Hermès were seen as being stingy with information.
One analyst noted that Gucci and LVMH tend to share details on their flagship brands, Gucci and Louis Vuitton, respectively, but tend to lump together financial results on their smaller brands or recent acquisitions, making it difficult to discern how each part of the business is performing.
“That lack of disclosure is not justified unless there is something to hide,” one analyst suggested.
According to some observers, increasingly stringent disclose demands may have been at least one factor behind LVMH’s recent decision to delist its stock in New York and Brussels. LVMH said it ended its American Depositary Receipt program and Brussels listings because the trading volumes were negligible and the listings were costly to maintain. More than 99 percent of investors trade LVMH’s stock on the Paris Bourse.
However, LVMH remains registered with the SEC in the U.S. and must still comply with its reporting ordinances, an LVMH spokesman said. Only companies with less than 300 U.S. shareholders are relieved of the onus.
News of the lawsuit comes amid increasingly tough times for Morgan Stanley.
People close to the bank said it is axing about 2,000 jobs as it seeks to cut costs in an economic downturn. Most of those job cuts will be in North America and they will be across all business division of the bank, these people said. Morgan Stanley declined to comment.
U.S. analysts took in the news with reactions ranging from pride to defensive.
Jeff Stinson, an analyst at Midwest Research, said, “I have never felt pressure myself to change a report or to put out positive research.”
Rich Wyler, a spokesman for the Association for Investment Management and Research, a nonprofit organization for investment professionals, characterized the conflict-of-interest issue as one of the “unintended consequences” of the SEC’s sweeping deregulation measures of 1975. Those changes altered the way banks funded their research departments so that they relied heavier on investment banking income rather than fees from investor clients.
The organization condemned companies that force analysts to give positive opinions. “For companies to threaten analysts, to try to get them fired or complain to their bosses when what [the analysts] are trying to do is independent thinking — that, in our view, is unethical.”
Still, Wyler said he’s optimistic that the climate is improving for more independent research, citing an increasing percentage of sell ratings from analysts and the example set at Citibank, which spun off its research arm into a separate subsidiary.
“We are seeing improvements and expect to continue to see them in the future,” he said.