Two days after the markets reopened in September, Laura Martin, a managing director and influential research analyst for Credit Suisse First Boston, downgraded all 11 entertainment and cable-industry companies in her portfolio, among them Disney, Viacom, USA Networks, MGM, Comcast and Insight Communications.
“If the 2002-2003 period is as bad as prior reported declines, the worst case is that these stocks could fall 25 to 30 percent,” she wrote in her Sept. 19 report.
Coming so soon after Sept. 11-and at a time when the market was in a deep slide-her call made a big impression on all but the stocks themselves, which already were in decline. But a little over three weeks later, Ms. Martin was out of a job.
Hundreds of other CSFB employees were let go that day, Oct. 12. But those hundreds of others were not well-respected, highly compensated, high-profile analysts, as the Pasadena-based Ms. Martin was. Just five days later, on Oct. 17, the 43-year-old analyst was given a third-team ranking by Institutional Investor magazine for the second year in a row, a sign of confidence by money managers from all over the country who were polled.
Officially, Ms. Martin was a victim of CSFB chief executive John Mack’s attempt to bring the firm’s high costs into line. But those close to Ms. Martin are saying that her Sept. 19 report was surely a factor in her dismissal.
Ms. Martin was alone in making the downgrade call-one that other analysts outside CSFB were loath to make. And, according to sources both inside and outside the firm, none of whom wanted to be named, Ms. Martin’s downgradings had elicited a very strong reaction from within CSFB, from some of its most senior investment bankers-mediainvestment-banking guru Jill Greenthal, to name one. Sources said that bankers tried to talk her out of the downgradings, and some even raised questions about the intellectual underpinnings, as well as the timing, of her call.
A spokesman for CSFB declined to comment, refusing even to confirm that Ms. Martin was among those let go on Oct. 12. Ms. Martin, reached on her cell phone, refused to discuss the matter at all, presumably because a severance package is at stake.
But others close to her said Ms. Martin believes her Sept. 19 report had something to do with her inclusion on the layoff list.
If so, it raises new questions about CSFB’s ability to maintain the Chinese Wall, as it is known on Wall Street, between its analysts and its investment bankers. The need to help reinforce that divide is one of the reasons Mr. Mack was brought in to CSFB and why his predecessor, Allen Wheat, was forced to resign.
The Securities and Exchange Commission is investigating CSFB’s tech-banking superstar Frank Quattrone and his Palo Alto–based team after questions were raised about their initial-public-offering practices and the allegedly cozy relationship between Mr. Quattrone and his tech research staff.
Coming on the heels of effusive calls by Internet analysts that drove the now-
defunct tech boom, that case has prompted a renewed look at the independence of analysts across the board. Maintaining that Chinese Wall is considered key to keeping investors’ trust.
Ms. Martin may well have been let go because of her $3 million salary, a large cut at a time when CSFB-like most of the other major investment banks-is struggling to bring down costs. Nonetheless, the events surrounding release of the Sept. 19 report provide a revealing look at the tensions between analysts struggling to make independent calls and bankers anxious to please clients and bring in lucrative banking deals.
Ms. Martin was no novice. She had 18 years of banking experience and was a frequent presence on CNBC and CNN. Because of her position as CSFB’s lead entertainment analyst, she consorted with such powerful media leaders as USA Network’s Barry Diller, Viacom’s Mel Karmazin and Vivendi Universal’s Jean-Marie Messier.
A graduate of Stanford and Harvard Business School, she worked on Michael Milken’s Beverly Hills trading desk as a Drexel Burnham analyst through 1990. She then moved to the buy side for Capital Research, the prestigious Los Angeles–based investment-management firm, where she became very close with Vanity Fair mover and shaker Gordon Crawford, the most famous media investor in the business.
In 1994 she made the move to CSFB, where she began to cover the media and entertainment industry. While she wasn’t as famous as some of her peers-Morgan Stanley’s Mary Meeker and Merrill Lynch’s Henry Blodget, for example-she did make a name for herself. In October 1998, a Fortune magazine feature on the outstanding female graduates of Harvard Business School’s class of 1983 highlighted Ms. Martin as one who opted for the lucre of Wall Street.
“People rarely forget me,” she told Fortune . “I’m opinionated-and I don’t wear blue suits.”
She had a flair for the media life. In an article on Barry Diller in the Industry Standard in July, she was quoted as saying: “Barry Diller rocks and you can quote me on that, baby.”
But she was not just flash and zip, as underscored by her Institutional Investor ranking. In the cutthroat world of research analysts, an I.I. ranking can in many cases make the career of an analyst, to say nothing of the millions in bonus cash that immediately accrue.
While Ms. Martin never made the first or second team-those two slots have long been held by Merrill Lynch and Morgan Stanley luminaries Jessica Reif Cohen and Richard Bilotti-her third-team ranking, in probably the most competitive and most observed of all industries, did merit a favorable write-up from the magazine: “Because she has been on both sides of the table (i.e., worked on the buy and sell sides), investors value the intriguing, conservative assumptions and long-term stock calls of Laura Martin.”
Sources both within and outside CSFB recreated the days that led up to Ms. Martin’s firing. Immediately after Sept. 11, they said, Ms. Martin, who works out of a small CSFB office in Pasadena and lives in San Marino with her husband and three children, started thinking about downgrading her entire universe of stocks. Many of them-Walt Disney, for example-were rated as strong buys. Coming on the heels of a deep advertising recession, Ms. Martin saw the terrorist attacks signaling deeper trouble for those companies in the months ahead.
It was a gutsy call. Not only was it contrary to what her peers were saying, it also defied the nation’s mood, which was decidedly pro-American, shaky corporations and all.
“To downgrade your entire sector so soon after Sept. 11 seemed to be in very bad taste,” said a prominent media analyst from a rival firm familiar with Ms. Martin’s situation. “During those first weeks, there was a message all across Wall Street: Don’t downgrade stocks, it’s like kicking the country when it’s down. We all got the message from our bosses: Don’t commercialize this.”
But one way to get noticed in an increasingly crowded analyst community is to go against the grain. It’s a risky strategy: If you are wrong, it blows up in your face. But if you get it right, in come the precious I.I. votes and the resultant bonuses. Those who know Ms. Martin said she was well aware of the rewards such a good call could bring.
On Sept. 15, the Friday before the markets were to reopen, Ms. Martin called Al Jackson, CSFB’s global head of equity research. Mr. Jackson had imposed a week-long ban on all analyst actions, and Ms. Martin was looking for the go-ahead to issue her reports on Sept. 17.
According to a source familiar with the conversation, Mr. Jackson told her it was her call-but with some trepidation. He
reportedly warned her to have good support and research to back up her industry downgrade. Mr. Jackson declined comment. Ms. Martin reportedly assured Mr. Jackson that she had 10-year data and models to back up her call.
On Sept. 17, the markets reopened to a precipitous drop. Viacom and Disney plunged, respectively, 11 and 18 percent, and the cable companies took a big hit. Ms. Martin, however, thought her industry’s future was bleaker than that. She planned to go ahead with her downgrade.
Senior research officials within the firm had deep concerns about her call-both its timing and its analytical underpinnings. They nevertheless supported her decision. More likely to be upset, Ms. Martin apparently
realized, would be the firm’s investment bankers, who had banking relationships with many of the companies on Ms. Martin’s list.
According to sources, on Tuesday afternoon Ms. Martin called managing director Jill Greenthal, global head of media investment banking for CSFB, to give her a heads-up. Ironically enough, Ms. Greenthal-one of the most prominent media bankers on the Street-was a business-school classmate of Ms. Martin’s at Harvard and was featured in the same Fortune class-of-1983 article.
Ms. Greenthal declined to be interviewed. But according to sources familiar with the conversation, she had strong reservations about Ms. Martin’s rationale for the report. “I’m surprised by what you are doing, Laura,” she said, according to those familiar with the conversation. “Particularly on the cable stocks. Your assumptions are wrong, and you could well regret it.”
Ms. Martin immediately became defensive, excitable even, those with knowledge of the matter say. She told Ms. Greenthal she wouldn’t be bullied out of downgrading all the stocks in her sector.
Ms. Greenthal continued to question Ms. Martin’s assumptions, arguing that the cable sector was a defensive one not worthy of a downgrade. Ms. Martin reportedly responded, “Listen, I get paid to be wrong. This is my intellectual integrity. We are not going to sacrifice 1,500 accounts for 10 companies that you guys have relationships with.”
Ms. Martin then called all 11 chief financial officers of the concerned companies. All reportedly told her: “Laura, you are wrong.”
Ms. Martin also reportedly sent an e-mail to Ernesto Cruz, head of global equity capital markets. She inquired about the state of mind of the media bankers. Mr. Cruz, who declined comment, reportedly told her the damage with Ms. Greenthal was done, and there was no going back.
Until Oct. 12, life went on as usual for Ms. Martin. Her stocks remained flat, and there was no further interaction with New York.
But that day John Hervey, CSFB’s director of U.S. equity research, flew in on very short notice to the Pasadena office, arriving at noon with a woman from human resources. Ms. Martin was just returning from a meeting with Vivendi Universal chief executive Jean-Marie Messier at the Universal lot. Ms. Martin was reportedly surprised to see Mr. Hervey, who had never set foot in the Pasadena office before.
Mr. Hervey delivered the news: CSFB was shutting down the office, and everybody there was laid off.
According to witnesses, Ms. Martin was flabbergasted. “Help me understand this,” Ms. Martin said, her voice rising. “I’m ranked No. 3 in entertainment this year. I cover two spaces; I would have been ranked in cable if I hadn’t given up coverage after the merger. I’m doing global media for Al Jackson. I’m doing three people’s work. How are you going to lay me off?”
Mr. Hervey was visibly upset and apologetic, say those familiar with the encounter. But he told Ms. Martin it was a firm decision to pull research back to New York. There was no mention of the run-in with Ms. Greenthal.
Ms. Martin was very emotional, those familiar with the matter say. At 43 years old, with nearly 20 years in the business, she was being told to pack her desk.
Sources said she went on to negotiate a settlement for herself-about 50 percent of last year’s bonus, which sources familiar with the talks say was in the area of $3 million. Mr. Hervey also allowed her four weeks to clear out of the office and agreed to let her take all of her intellectual property with her on a CD-ROM.
Ms. Martin, however, managed to get the last word, sending a final e-mail to research associates and other managing directors throughout the firm.
She wrote: “When the head of Capital Research [Gordon Crawford] was trying to keep me from coming to CSFB he said: ‘You can’t go to the brokerage business; they fire people there.’ After seven years, his warning came true. Working with all of you, the best and brightest, has been a privilege and a pleasure. Thanks for seven wonderful years. With great fondness, Laura.”
Thirty minutes later, New York disconnected the Pasadena office’s e-mail system.