PARIS — The chill is on — and it isn’t the weather.
This story first appeared in the January 23, 2004 issue of WWD. Subscribe Today.
In a decision that could herald similar moves by other investment banks, Morgan Stanley on Thursday said it would suspend its equity research on French luxury goods giant LVMH Moët Hennessy Louis Vuitton. The decision follows the ruling by a Paris court that Morgan Stanley must pay LVMH at least $38.1 million, or 30 million euros, for gross misconduct.
The investment firm said it continues to stand by its luxury analyst Claire Kent and her research — the focus of LVMH’s bias and conflict-of-interest suit. Kent is one of the top-rated analysts in the luxury goods sector.
“However, the untenable situation created by the court judgment makes it impossible for us to continue to express our opinions on LVMH at this time,” Stephan Newhouse, chairman of Morgan Stanley International, said in a statement.
Newhouse characterized the court’s decision as unprecedented. “Claire feel(s) that she is unable to express her honestly held beliefs about LVMH.”
Earlier this month, a Paris commercial court sided with LVMH, which accused Kent and Morgan Stanley of a premeditated and systematic effort to denigrate LVMH while favoring its rival Gucci Group. Gucci is advised on finances and acquisitions by Morgan Stanley.
The investment firm plans to appeal the ruling. In the meantime, a chartered accountant was appointed by the judges to calculate the amount of “material prejudice” still owed to LVMH.
The case, first launched a year-and-a-half ago, has had a major impact on the global investment analyst community, with Morgan Stanley warning it would have “grave consequences” for freedom of speech and threaten the analyst profession.
LVMH declined all comment Thursday.
An absence of coverage on a publicly traded stock by an equity firm has no material impact on the trading of shares. Research reports are — theoretically — investment tools for the investor. Regarding the impact of Morgan Stanley’s suspended coverage of LVMH, time will tell if and how the stock will be affected. Generally, shares of companies without any coverage can still experience healthy and robust trading. In these cases, investors conduct their own research or turn to smaller, independent research firms.
With LVMH, which trades on exchanges in Paris, Berlin, London, Frankfurt and Buenos Aires, less brokerage coverage may have no impact at all. The company is large enough — and well known enough by the investment community — that investors may be able to work without Morgan Stanley’s research reports. In addition, LVMH still will be reviewed by other luxury goods analysts in Europe, including those working for Merrill Lynch, Goldman Sachs, J.P. Morgan and HSBC.
Meanwhile, in the U.S., financial industry executives expressed understanding of Morgan Stanley’s decision and continued concern over the court ruling in the LVMH case. Ken Wasik, director of the consumer products group at the investment bank Houlihan Lokey Howard & Zukin in New York, said Morgan Stanley’s decision to drop coverage of LVMH following the Paris court defamation ruling is “a sign of things to come.”
Wasik said it’s important to understand that the research generated by the large equity firms such as Morgan Stanley “is not geared to the average investor.”
“The research is expensive to produce, and is really designed for larger hedge fund investors,” Wasik said. Regarding Morgan Stanley’s decision, Wasik said he thinks “it’s a bellwether of what’s in store. I’m surprised we’re not seeing more of this going on.”
An investment banker, who asked not to be identified, said the impact of the Paris court’s decision and Morgan Stanley’s withdrawal of investment research coverage on LVMH “reflect the two realities of the industry.”
“The one reality is what analysts say to investors,” the banker said. “And the other reality is what they’re writing in their reports. And those two realities are completely different.”
In turn, the investment banker said he expects smaller, independent research firms to see an uptick in business as the larger firms drop or reposition their coverage. “This will certainly have a chilling effect,” he added.
Rich Wyler, a spokesperson for the Association for Investment Management and Research, the global professional association of Chartered Financial Analyst charterholders and other investment professionals, said, “We’ve said for some time that there’s certainly a need to strengthen the Chinese wall between research and investment banking, the corporate piece hadn’t really been addressed in regulations or much in public discussion. Corporations can still put tremendous pressure on analysts to write a positive research report. Now you have them trying to attach a cost to what a negative opinion is. The question is, ‘Is it the analyst’s true opinion or not?’ Ethically it has to be the analyst’s true opinion.
“I think things like this could carry over here [to the U.S.],” added Wyler. “They’re both global companies that are involved. They have universal policies. All over the world they’re looking at it because of the size of the judgment in particular.”