Confessions of a Wall Street Analyst (52 page)

arbitrage, general
—The practice of buying securities in one market and shorting (selling) them in another, with the goal of capturing as profit any price discrepancies between the two markets.

arbitrage, merger
—The practice of seeking to make a profit on the difference between the stock prices of companies involved in a merger. In most cases, arbs bet that the merger will be completed within a certain time frame and that the acquiree’s (target’s) stock price will eventually rise to the offered takeout price as the deal nears completion. To counter other risks not specific to the probability of the acquisition being completed, arbs usually sell short the acquiror’s shares (see definition of
short
).

arb spread
—The difference between the price offered for a company and where it’s currently trading.

Baby Bells
—Seven local telephone monopolies established in 1983 when AT&T (“Ma Bell”) was broken up into a long distance company (AT&T) and seven “Baby Bells”: Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell Telephone Company (later renamed SBC), and US West. Subsequently, SBC acquired Pacific Telesis (1996–7) and Ameritech (1998–9); Bell Atlantic acquired NYNEX (1996–7) and non–Baby Bell GTE (1998–9), forming Verizon; and US West merged with Qwest (1999–2000).

brokerage firm
—Wall Street firm providing trading and investment advisory ser
vices to individual and/or institutional investors. Known as the
sell-side.
Commissions paid by investors comprise the bulk of revenues. Note: the vast majority of Wall Street firms provide both brokerage and investment banking services under one roof. See the definition of
investment bank.

buy-side analyst
—Analyst employed by institutional money management firms; provides in-house investment analysis and advice to that firm’s money managers.

EBITDA
—Earnings before interest, taxes, depreciation, and amortization. An alternate measure of corporate profitability often used in the nineties for startup companies with little or negative earnings per share. Sometimes also referred to as operating cash flow.

EPS
—Earnings per share. The most commonly used measure of a company’s current profitability.

emerging broadband telecom companies
—Startup companies focused on building high-speed, broadband-ready (i.e., Internet-ready) intercity and international fiber-optic networks. Included Qwest, Global Crossing, and many others, most of which eventually went bankrupt.

I.I.
—
Institutional Investor
magazine.
incumbent long-distance companies
—AT&T, MCI, Sprint, and LDDS (subsequently renamed WorldCom and MCI WorldCom).

insider tipping
—Occurs when an insider (“tipper”) deliberately passes on information that he knows is material and nonpublic to an outsider (“tippee”), in violation of a fiduciary duty to the issuer, where the insider’s intent is to give that tippee a trading advantage in the stock market.

insider tippee
—The person receiving insider information. Tippee liability requires that the recipient knew or should have known that there has been a breach of fiduciary duty by the source of the information.

insider tipper
—The person passing on inside information.
insider trading
—The act of buying or selling a security while knowingly having material, nonpublic information about the security, in breach of a fiduciary duty or other relationship of trust and confidence.

institutional salesperson
—Individual employed by a brokerage firm who is responsible for serving institutional money managers. He or she provides investment advice, passing along investment ideas from the firm’s research analysts and trading ideas from its trading desk, and tailoring that advice to the unique needs and investment style of each institution.

institutional investor
—Portfolio manager or analyst working at a professional money management firm. These firms include mutual funds, pension funds, hedge funds, and arbitrage firms. Also known as a buy-sider.

investment bank
—Wall Street firm providing advice to corporations and governments with regard to raising funds (selling stocks, bonds, and other securities)
and with regard to mergers and acquisitions. Fees paid by corporations and governments comprise the bulk of revenues. Note: most investment banks also have brokerage divisions and thus provide advice to both issuers (corporations and governments) and investors, generating potential conflicts of interest.

IPO
—Initial public offering. The process by which a privately owned company issues shares to the public for the first time.

IPO spinning
—The act of an investment bank allocating shares in hot IPOs to corporate executives, presumably in hopes of receiving investment banking business from those corporations.

NASD
—National Association of Securities Dealers.

P/E ratio
—A stock’s price (per share) divided by its annual earnings per share. The most commonly used valuation measure for publicly traded stocks, though the EBITDA multiple was commonly used in the late nineties, especially for startups.

ratings categories
(for sell-side research opinions and recommendations):

rating 1:
Often labeled Strong Buy or Buy. Top rating used by sell-side analysts. Most commonly defined as a stock for which the analyst foresees 20 percent or more upside over the next year.

rating 2:
Often labeled Accumulate or Outperform, or sometimes Buy. Most commonly defined as a stock with 10–20 percent upside over next year.

rating 3:
Commonly labeled Hold or Neutral. Most commonly defined as a stock expected to trade up or down 0–10 percent over the next year. Often perceived by institutional investors as an unattractive stock.

rating 4:
Commonly labeled Underperform or Reduce. Analyst expects 10–20 percent downside over the next year. Second-lowest rating. Rarely used by Wall Street analysts in the late nineties.

rating 5:
Commonly labeled Avoid or Sell. Analyst expects 20 percent or more downside over the next year. Lowest rating. Extremely rarely used in late nineties.

retail broker
—Individual employed by a brokerage firm (such as Merrill Lynch or Smith Barney) responsible for advising individual (“retail”) investors. Also known as a financial consultant or financial adviser.

retail investor
—Individual investing his or her own money, sometimes with the advice and assistance of a full-service retail broker (financial consultant) such as Merrill Lynch or Smith Barney, and sometimes via discount and/or online brokers such as Schwab or Ameritrade.

sell-side analyst
—Analyst employed by an investment bank and/or brokerage firm; provides investment analysis and advice to that firm’s institutional and/or retail investor clients. The analyst’s research is often published, widely distributed, and sometimes widely quoted.

short
—As in “shorting shares of x company.” The practice, used especially by arbi
trageurs and hedge funds, of borrowing someone else’s stock and selling it with the commitment to buy it back later at the future market price. The shortseller’s bet is that the stock will fall and then he or she can buy back the shares at a lower price, pocketing the difference.

startup local phone companies
—Companies that attempted to compete with the Baby Bells by building local phone systems and/or renting parts of the Bell networks. They included companies such as Metropolitan Fiber Systems (MFS), which was acquired by WorldCom in 1996; Teleport, acquired by AT&T in 1998; and a long list of companies that eventually went bankrupt including ICG, Intermedia, Focal, McLeodUSA, Metromedia Fiber Network, and Winstar. Also known as competitive local exchange companies (CLECs), though we avoid use of that acronym in this book.

swaps
—In the telecom industry, the exchange of communications capacity between two companies with one company “purchasing” capacity from a second company as long the second agrees to purchase capacity from the first. If not disclosed to investors, they are very misleading as they suggest that revenues are higher and growing faster than they really are.

venture capitalist (VC)
—Investor who specializes in investing in startups and other not-yet-public businesses with exceptional growth potential.