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Quarterhill Inc T.QTRH

Alternate Symbol(s):  QTRHF | T.QTRH.DB

Quarterhill Inc. is a Canada-based company, which is engaged in providing of tolling and enforcement solutions in the intelligent transportation system (ITS) industry. The Company is focused on the acquisition, management and growth of companies that provide integrated, tolling and mobility systems and solutions to the ITS industry as well as its adjacent markets. The Company’s solutions include congestion charging, performance management, insights & analytics, analytics, toll interoperability, mobility marketplace, maintenance, e-screening, tire anomaly detection, multi-modal data, intersection management, and others. Its tolling includes roadside technologies, commerce and mobility platforms, audit and enforcement, and tolling services. Its safety and enforcement comprise commercial vehicles, automated enforcement, freight mobility, smart transportation, and data solutions. The Company’s wholly owned subsidiary is International Road Dynamics Inc.


TSX:QTRH - Post by User

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Post by BadFinancialson Jan 14, 2009 5:30pm
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Post# 15704842

Beware: HIDDEN AGENDA

Beware: HIDDEN AGENDAFrom Canadian Business

March 5 2001

Hidden agenda

How are you supposed to known whether to trust analysts in the absence of full disclosure?

By Keith Kalawsky

Get this. Robert Millham, a veteran analyst at Research Capital Corp., issued a “speculative buy” rating on Wi-LAN Inc. (TSE: WIN) in early February. You’ve heard about Wi-LAN, the brainchild of Hatim Zaghloul and Michel Fattouche, those wonder boys of wireless in Calgary. Like most of the overhyped, overvalued technology firms that haven’t earned dollar one, Wi-LAN wooed investors, its stock reaching a high of $87.50 last year. The party didn’t last. By the time Millham’s report came out on Feb. 9, Wi-LAN’s shares had shriveled to $8.40. (They’ve sunk even further since.)

While Wi-LAN was flat-lining, Millham had the gumption to issue a $50 price target—an astounding 495% return. But he hemmed and hawed in his report, cautioning investors that Wi-LAN “will have a hard time meeting 2001 revenue expectations.” Read further, and it seems Millham’s three-page report, despite the hefty price target, is chock-full of speculation about industry spending on wireless technology and Wi-LAN enlisting European customers. Buried near the end is this curious boilerplate: “Research Capital has acted as an underwriter and/or provided financial advice to Wi-LAN within the past three years.”

Actually, it was in January—less than a month before Millham’s report--that Research Capital, along with CIBC World Markets Inc., handled a $13-million offering of Wi-LAN shares and warrants. (Units of one common share and one-half of a warrant were offered for $7.75 apiece.) Research Capital and CIBC took a 6% cut for underwriting fees. Fair enough. But here’s the rub: Wi-LAN gave Research Capital and CIBC the option of buying 10% of shares sold in the offering. Anytime in the next two years, they could purchase common shares for $7.75. Put all the pieces together, and it’s plain that Millham is mixed up in a major conflict of interest: first, he recommended Wi-LAN—and set an exorbitant price target for its stock—although Wi-LAN is a client of Research Capital; and second, his firm stands to profit from endorsing Wi-LAN shares. Sadly, this is not an isolated incident.

The Toronto Stock Exchange, Canadian Venture Exchange and the Investment Dealers Association of Canada (IDA) are finally taking notice. They’ve struck the Securities Industry Committee on Analyst Standards, which will release draft recommendations in mid-April. It’s rumored that the standards will improve disclosure of conflicts of interest, establish an analyst code of conduct and suggest educational and competency standards. Analyst rules are long overdue; there are no nationwide, mandatory standards, which leaves investors at the mercy of countless shenanigans. The standards committee must bring in stringent, investor-friendly and enforceable standards—not a bunch of wishy-washy guidelines. A meek set of rules won’t subdue the rising sentiment that the games played by research and corporate finance departments must stop. “Analysts have almost become whores,” grumbles Michael Palmer, president of Veritas Investment Research Corp., an independent market research firm in Toronto. “They’re being sold by corporate finance.”

Egged on until lately by a seemingly unstoppable bull market, investors poured billions into stocks. Interest in investing has reached a fever pitch, and the opinions of analysts have assumed shaman-like importance. Investors are inundated with analyst predictions through the media. Analysts must be trusted experts, investors assume. Not necessarily. It’s not that all analysts are misinformed, crooked or unethical. But the dynamics of the securities industry discourages good research and compromises analysts’ objectivity.

Investment now see underwriting--not trading stocks or providing research—as the road to riches. After all, brokerage commissions have fallen from about 20¢ a share to 3¢ a share, Palmer estimates. “You can make a hell of a lot more money taking a dollar-a-share commission on corporate finance deals,” he says. John Richardson, vice-president at Lincluden Management Ltd., an Oakville, Ont.-based institutional investment management firm, puts it best: “Brokerage analysts are hired by their employers to generate revenue and profit—not to provide a public service.”

Analysts are tangled in a catch-22. They’re compelled to compliment companies who’ve done business with their firms through, say, an IPO or bond issue. Otherwise, the firms might be passed over for future underwriting deals. It’s also common for investment banks to hold stock in their clients’ companies, so coverage by cooing analysts can wow investors, boost shares and turn a tidy profit for the firm. Why is it so hard to find research on small- and mid-cap companies? Analysts focus on popular stocks that generate large volumes of trading revenue (and commissions), or companies that regularly issue more stock, which keeps corporate finance departments busy.

Millham maintains he has not been involved in a conflict of interest. On March 13, he told Canadian Business that he dropped his Wi-LAN price target to $30 because the market took a nosedive. (Still, $30 would be a 323% projected return from Wi-LAN’s share price of $7.10 at that time.) “It’s still an extremely high return from the current level,” he agrees, “but if there’s one thing we’ve seen in the history of Wi-LAN, it is that it’s volatile and is able to go up severalfold in a very short period of time.” Fine. But is he pressured by Research Capital’s corporate finance department to slap an outrageous price target on Wi-LAN’s shares to earn—and keep—the company’s patronage? “It’s our hope that any companies I cover from a research perspective, we’ll also develop a relationship with from a corporate finance perspective,” he replies. But Millham insists he’s made unpopular calls before. “There are a number of companies that I’ve changed my opinion on, that we’re probably gonna kiss goodbye in terms of any future corporate finance,” he says. Still, Millham concedes: “I suspect that ultimately, whether it’s corporate finance or research, everybody wants to give clients, you know, winning strategies and winning stocks, always.”

Analysts have clearly gone too far, says Jason Donville, president and head of research at Lightyear Capital Inc. in Calgary, one of Canada’s newest investment firms. “Everybody is on their heels, saying, ‘, we overdid it,’” says Donville. “It’s been 105% strong buys and nothing else.”

There are two sides to Purdy Crawford: the man and the résumé. A glance at his two-page curriculum vitae suggests the former chairman of Imasco Ltd. is gung-ho about corporate governance and securities regulation. The 69-year-old lawyer has chaired numerous committees and boards for the TSE, the Ontario Securities Commission (OSC) and others. His latest pursuit is leading the committee on analyst standards. But Crawford--in the flesh—is not the fist-pounding, anti-analyst, trash-talking zealot you’d expect to head this high-profile committee. He’s surprisingly laid-back about the whole thing; soon after Crawford agreed to run the standards committee, OSC chairman David Brown recommended him to chair a five-year OSC securities law review. “If I’d known about the review—I really wanted to do that one—I probably would not have done the analyst one,” Crawford quietly confides.

Still, he figures investment firms need a major attitude change. “We’ll never deal with the fundamental issues completely because there are conflicts inherent in the system,” he says. “It’ll only cease to be a problem if issuers and investment dealers walk the talk and say they’re serious about their analysts being independent.” He’s got that right. All the rules in the world won’t help if there isn’t a sweeping cultural change on Bay Street.

Tougher analyst standards might be the catalyst. And there is no shortage of ideas on the kinds of rules needed. Crawford and his committee should chew on the following proposals. Let’s hope this turns out to be more than wishful thinking.

Wish No. 1: Shine the light on conflicts of interest with full disclosure. “Sunshine is the best antiseptic to conflicts of interest,” says John Richardson of Lincluden. Investment firms are already required to reveal their relationships to the companies covered in research reports. But that’s not enough, because the ownership stake of the analyst or his investment firm is rarely disclosed. Investors should be able to see the number of shares owned by the investment firm and when—and at what price—its interest was acquired. “If you do that and nothing else, you will clean up 75% of the problems with respect to conflicts of interest,” says Donville of Lightyear Capital.

Better disclosure might shed some light on why Todd Coupland, an analyst at CIBC World Markets, slapped a “speculative strong buy” rating on Wi-LAN on May 31, 2000. Coupland issued an aggressive 12-month price target of $200, more than seven times what the stock was trading for at the time. On May 8, Wi-LAN issued a prospectus for the offering of 600,000 shares through the exercise of special warrants. Four underwriters, including CIBC, handled the distribution. How can we not question Coupland’s optimism? Did he truly love Wi-LAN, or was he just blowing smoke up our behinds for CIBC’s or his own gain? Investors should know.

Wish No. 2: Let investors judge analysts for themselves. We need an audited, public record of analyst recommendations, quarter by quarter. That way, investors could evaluate an analyst’s track record on specific stocks and sectors. Better yet, institutional investors should grade analysts. “When I was director of research for Credit Suisse First Boston in Southeast Asia, I’d go and see Fidelity, and they’d have a scorecard on you,” recalls Donville at Lightyear Capital. Few Canadian firms use this system. “If the institutions start rewarding good research and good research analysts, then the analysts will gravitate toward where they’re getting rewarded.”

Wish No. 3: Forget the fast-talking rookie stock pickers; give investors in-depth research reports from experienced analysts. To provide good research, analysts must know their stuff. The standards committee will surely wax poetic about the need to teach analysts ethical standards, for instance. It makes more sense to ensure they have the skills to properly judge the companies and industries they cover. As a research manager, admits Michael Palmer of Veritas, “you would hire some guy who knew the jargon in the high-tech area. And you would sit him in front of some client who knows nothing about high tech. The guy’s got the patter and can talk about it. But he doesn’t understand a goddamned thing about financial statements or cash flow or the market.”

Many analysts blew it when evaluating Nortel Networks Corp. Although the company hasn’t made a dime since John Roth took over in 1997, it kept trumpeting “earnings from operations,” which excluded the cost of Nortel’s acquisitions. Tom Astle, an analyst with Merrill Lynch & Co. Inc., issued a long-term buy recommendation on Nortel in mid-January, with a 12-month “price objective” of $60. In his report, Astle cited earnings per share figures of 52¢ in 1999 and earnings estimates of 74¢ per share for 2000 and 98¢ for 2001. His report gave the impression that Nortel was turning a profit. In fact, it was losing money—a lot of it.

“Now here’s a company that was reporting a loss under Generally Accepted Accounting Principles,” Palmer seethes. “Nortel just invents some number, the Street goes along with it, the media goes along and, all of a sudden, Nortel is reporting earnings that don’t exist.”

When an analyst begins covering a stock, he should write a detailed report that covers all aspects of the company instead of issuing a skimpy research brief that’s heavy on jargon but light on solid analysis.

Wish No. 4: Change analyst pay and take away the temptation. Disclosure doesn’t mean squat if analysts are getting paid for anything but objective research. “Either directly or indirectly, analysts are going to receive compensation based on the work they do if it leads to an investment banking relationship,” says Brian Pow, an analyst with Acumen Capital Partners in Calgary. Investment firms offer to cover companies in exchange for corporate finance work. In some cases, companies will approach investment firms for a “consultation,” which is simply code for, “I’ll pay you for a positive research report.” The simple solution: investment firms should not make recommendations on companies their clients finance. “The industry would have a lot of problems with that recommendation,” Palmer says, “but on the other hand, as a regulator, I don’t know what the hell else you do.”

Wish No. 5: Put some teeth in analyst standards by establishing a national securities regulator. Because the analyst standards committee was struck by the TSE, CDNX and IDA—whose members are investment firms—you’ve got to wonder if it’s serious about instigating real changes. The IDA is self-regulatory. But Canada needs a strong, national securities regulator like the US Securities and Exchange Commission instead of a hodgepodge of provincial and federal bodies and self-regulatory agencies. There have to be real repercussions to breaking analyst standards.

“You either have an effective police force, or you have no police force and everyone knows it’s anarchy,” Palmer says. “Right now, we’re somewhere in the middle, where people think it’s being policed, but it’s not. And that is the most dangerous and lawless stage of all.” It will take much more than regulatory reform. Such big institutional investors as mutual and pension fund managers need to refuse to deal with analysts and firms that consistently back lousy deals. Money speaks louder than verbose rule books

Investors deserve more than excuses. Conflicts of interest are undermining the dependability of research for investors, while investment firms reap the benefits of big deals. Crawford and his analyst standards committee must listen to the growing number of complaints, develop some useful standards and force investment firms and their analysts to change. Then again, that may just be wishful thinking.


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