One upshot of the current environment, for some companies, is a change in the identity of our true audience. As an investor relations person, I’ve always thought of investors – individuals, portfolio managers, value, growth, whatever – as the audience.
But it’s not always so.
I was reminded of this by “Preparing for a Shrinking Economic World,” a column in the Nov. 1 issue of Genetic Engineering & Biotechnology News. Speaking of the biopharma business (as you might guess from the publication), the article notes that giant pharmaceutical companies are awash in cash – $9 billion on average among large caps – while the bear market limits the options of smaller companies:
Alas, there is one liquidity event that won’t be appearing any time soon: the biotech start-up going public. Since the first of several painful Wall Street events began, there have been several biotech companies that have withdrawn their plans to go public … This clearly leaves biotech in a state of vulnerability, as IPO hopefuls may seem further from exit. This also means that ready, willing, and able buyers from Big Pharma will perhaps make a strategic acquisition.
Truth is, this applies to many industries. I’ve heard entrepreneurs in a variety of businesses talking about exit strategies: Private companies no longer count on doing IPOs, but view their most likely exit as being acquired. In the public company world, too, smaller companies are thinking more about acquisition as a path to maximizing shareholder value.
So let’s talk about the 800-pound gorilla. Our audience may not be a mutual fund analyst in Boston or a little old lady in Kansas City. The real target audience (or at least one) may be a bigger company that, in a few months or years, may replace our many shareholders with a single 100% owner. And our public disclosures also influence these potential acquirers.
Are the messages the same, or different, for an M&A audience? As investor relations professionals, committed to maximizing shareholder value, we need to study up on this class of investors. They may be strategic acquirers in the same industry, or financial buyers like private equity funds. I don’t know all the answers, but we ought to re-read The Quest for Value and pay attention to news and trade articles explaining the motivations and structuring of acquisitions.
My impression from a few M&A experiences is that deal-oriented investors do have different information needs, or preferences. Earnings per share are out; the acquirer or i-banker will apply ratios to EBITDA or net income. Enterprise value, debt on the books and cash in the bank are intensely relevant. Assets that can be sold matter. Working capital and cash flow. In the biopharma field, and perhaps others, future products also drive value – again, often via multiples of projected cash flows.
I remember, years ago, writing an annual report for my employer – our last as a public firm – while top management was negotiating to sell the company. The deal was finalized in the same time frame as the annual report. It was gratifying when, a few weeks later, someone on staff with the new owners told me their top management had been especially impressed by the extensive new-drug pipeline graphic that had been a labor of love in this annual report. IR mattered.