Archive for June, 2010

Before doing that IPO …

June 30, 2010

Think twice – maybe you should even take a third, fourth or fifth look – before going public, Erik Birkerts advises private-company owners in a piece called “Hey, Where’s My Gulfstream?!” in the July 2010 issue of Mergers & Acquisitions.

Birkerts, a veteran of venture-backed companies that did IPOs in 1999 and 2007, now is a partner in Evergreen Growth Advisors, which consults on growth strategies. His reflections on the process offer some useful insights for investor relations professionals and senior management – before or after an IPO.

“The initial public offering of stock – the IPO – holds a mythical place in American business,” Birkert observes. “Employees consider the IPO to be synonymous with windfall riches. Company founders envision the IPO as the ultimate validation of their genius after years toiling on their ideas. Venture capitalists finally look forward to full nights of sleep with the anticipated returns from the IPO ‘exit’ juicing their portfolio. The siren call of the IPO for company lawyers, bankers and accountants is so loud and obvious that no further comment is needed.”

With the IPO market showing some signs of reviving in the first half of 2010, it may be prudent for management teams to – well, look twice before leaping. The M&A journal (which may have a bias as implied in the publication’s name) is available only to members of the Association for Corporate Growth, a private equity and deal-oriented group, so I’ll summarize the steps Birkert advises:

  • Carefully dissect arguments for why the company should go public
  • Have a specific plan for using the capital & communicate it early and often!
  • Challenge your thinking with independent, objective outside advisers
  • Operate from your worst-case financial scenario
  • Select your investment bankers wisely

Birkert notes that management may think of “many terrific reasons to go public,” but “there are as many or more reasons why going public should be feared.” IROs and IR counselors already know these reasons – distractions for management, Sarbanes Oxley burdens, expenses of legal, auditing, IR and other costs, etc., etc.

I particularly appreciate two pieces of Birkert’s advice aimed at not disappointing investors who buy in the initial offering:

  • Communicating your plans for use of the capital. “Although public filings may have generic language, it is best to be explicit during the road show so that the Street accounts for this spending [of the money raised].” If capital goes toward expenses, the early earnings as a public company may disappoint, he says. Worse yet, if management doesn’t have a clear plan, there will be pressure to do something, which sometimes leads to an ill-considered acquisition as a strategic but risky deployment of that capital.
  • Using a worst-case financial secenario. “The temptation is to make the financial forecasts sparkle so as to make the road show pitch compelling to potential investors. … However, if there is one time that Murphy’s Law can be counted on it is during the first year of being a public company. … Be conservative with financial forecasts. Set yourself up to succeed – not to fail.” Leaving a little money on the table during the IPO is better than setting yourself up for a bruising stock-market experience – and litigation.

Not trying to be negative here. I love public companies and the whole relationship with capital markets. But Birkert’s cautionary words echo the sentiments of many small cap IR people – and CEOs and CFOs – who are public but look longingly at privately held peer companies whose “exits” or “liquidity events” kept them private.

© 2010 Johnson Strategic Communications Inc.

Body language & tone are back

June 16, 2010

In a spirit of renewed regulatory machismo, the SEC is reportedly investigating whether generic drug company Mylan violated Regulation FD by “sounding excited” and dropping positive hints about upcoming earnings in a 2009 meeting with a analysts and investors, according to today’s Wall Street Journal (page C1).

The incident is a reminder of the risks of what should be normal investor relations activities – meetings and phone calls with the Street. Exactly what happened in the Mylan meeting isn’t clear from the WSJ or a similar Reuters article – but this story is going to be worth following.

According to the WSJ, the SEC has asked Mylan and some analysts who attended the meeting last September – three weeks before the end of the third quarter – what the company said regarding earnings for the quarter. The day after the meeting, the paper said, Mylan shares jumped 7% – and the stock rose further when earnings were reported in late October.

Mylan told the WSJ the company is “confident the communications made during the conference were entirely appropriate.” The meeting wasn’t webcast, and Mylan didn’t issue a news release or file anything with the SEC disclosing information from the meeting – as Reg FD would require if something material was said.

Details so far are scarce. The most color came from analysts cited by the WSJ:

A UBS analyst who attended the Sept. 9 meeting said in a report to clients the next day that Mylan’s “management sounded excited about the upcoming 3Q.” The report added: “although not saying it, management basically implied once again that it was confirming 2010 EPS guidance.” Other analyst notes also said the company was “excited” about reporting earnings.

SEC cases based on Reg FD have been rare. Reuters notes that the Mylan incident is reminiscent of an SEC action against Richard Kogan, former chief executive of another drugmaker, Schering-Plough. Reuters recalls:

The SEC investigated [Kogan's] private meetings in September 2002 with four institutional investors in Boston, three of which were among the company’s largest investors.

“At each of these meetings, through a combination of spoken language, tone, emphasis and demeanor, Kogan disclosed negative and material, nonpublic information regarding Schering’s earnings prospects,” including that the company’s 2003 earnings would significantly decline, the SEC found.

In the Schering-Plough case, the stock price took a dive after the lunch meeting with investors. Publicly, the company remained silent. The CEO was gone a few months later, and Schering-Plough ultimately agreed to pay a $1 million civil penalty to the SEC. Kogan paid $50,000.

So … maybe body language and tone are back in the SEC’s sights. We’ll have to see. Today’s news is a reminder that IR professionals – and senior managers – need to be vigilant about even inadvertent guidance on earnings in private meetings.

One way to prevent this problem is to announce an analyst day in advance and webcast the presentations. That works for larger meetings.

I believe companies also should continue to meet personally with individual investors or small groups – this is how relationships are built. The executive team and IR should rehearse  beforehand what’s to be discussed – and not discussed – especially regarding upcoming earnings. If selective disclosure happens, Reg FD prescribes a pretty clear cure: broad disclosure of the information to the market.

What’s your approach to avoiding potential Reg FD problems?

© 2010 Johnson Strategic Communications Inc.

Good news for BP shareholders?

June 1, 2010

Let’s not take this to extremes, but a recent study offers the counter-intuitive notion that companies with great reputations don’t generally provide great returns for investors – and a decline in corporate reputation can presage better returns.

In the Spring 2010 issue of the Journal of Portfolio Management, economist Deniz Anginer and finance prof Meir Statman look at Fortune magazine’s “Most Admired Companies” rankings from the start of that survey in 1983 up through 2007.

The annual “Most Admired” survey reflects opinions of executives, directors and analysts on companies in their own industries.  You might expect the stocks of firms with the best reputations to perform best in the market, but it just isn’t so.

The authors compare portfolios of higher-reputation companies vs. lower-rated firms, looking at 12-month returns following publication of the “admired” ratings:

We find that stocks of spurned companies, or those with relatively low Fortune ratings, beat the stocks of admired companies, or those with relatively high ratings.

… we also find that stocks of companies that moved up the reputation scale lagged stocks of companies that moved down the scale.

This study looks at a relatively short-term trade, a 12-month adjustment after a reputational change takes hold. It doesn’t consider multi-year differences in returns or valuation between respected and disrespected firms.

The authors also don’t explore causes of their counter-intuitive finding. But I believe a key factor is that reputation surveys are lagging indicators:

  • A company is recognized for rising reputation after peers in its industry see it deliver strong results, an increasing stock price, high-profile successes. And then? Well, high-flying companies and stocks tend to revert to the mean.
  • When bad things happen to a company, peers and analysts are quick to cast blame – the stock drops, company reputation sags. And then recovery begins.

The JPM article confirms what many value investors practice: Out-of-favor stocks may yield more opportunities than “admired” companies riding the wave, for the simple reason that less-popular companies are cheaper than glamour issues. And at least some of the high-multiple stocks are going to hit bumps in the road.

Of course, it isn’t much of an investor relations story to say “Our reputation is in the tank, so things can’t help but get better.” And IR people, as champions of our companies’ reputations, all want rising earnings, strategic accomplishments, recognition in places like Fortune … the good news that creates solid reputations.

But when times are tough, we may find some comfort in the reversion to the mean.

© 2010 Johnson Strategic Communications Inc.


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