Posts Tagged ‘Disclosure & valuation’

REIT disclosures help broader market

October 25, 2010

Most investor relations people are champions of disclosure – believers in the value of transparency for shareholders, as well as investors who might buy our stocks.

Now an article on the 50th anniversary of Real Estate Investment Trusts in National Real Estate Investor says the entire market – private and public – has gained from the emergence of publicly traded REITs and reliable financial data:

Thanks to Wall Street and a wave of IPOs [in the 1990s], modern REITs have not only provided liquidity to the commercial real estate industry, they have also upped the level of sophistication of financial reporting.

Ralph Block, a REIT investor and author of The Essential REIT, says the data in public disclosure makes a big difference from real estate investing years ago:

There has been an absolute revolution in disclosure and that’s true for most public companies. There is a lot more information available about not only the company, but also the properties.

Adam Markman, managing director of the independent real estate research firm Green Street Advisors, adds:

We think that the amount of information you can pull out of these publicly traded companies is helpful for the whole industry.

The benefit of “comps,” or comparative data on asset values and returns, probably carries over in many industries beyond real estate. Private equity investors and investment bankers often look to SEC filings of the public companies in a sector, as well as private information, to evaluate deals or valuations of companies.

The real estate industry also benefits from an education-minded trade group, the National Association of Real Estate Investment Trusts (NAREIT), that collects a wealth of data on real estate assets and returns – and puts the numbers out there on its website for investors (public or private) to track and use. Many trade groups keep data they gather close to the vest – to the detriment of their industries.

Of course, REITs haven’t had an easy go of it during the recent global meltdown-collapse-crisis-whatever-alarmist-name-you-want-to-call-it. For a typical REIT investor, these stocks are all about dividends – and generating the earnings or funds from operations to keep those dividends flowing is a challenge these days.

Referring to the three dividend cuts by mall owner CBL & Associates, REIT analyst Christopher Lucas of Robert W. Baird & Co., says:

That was a significant hit to the individual investor’s trust in the vehicle and in the operations, and it’s going to take some time to earn that trust back. … Now they have to rebuild the trust that investors placed in them to manage their balance sheet and their dividend much more consistently.

Managing performance to rebuild trust, of course, is what many companies in all industries are seeking to do as the economy bounces along in what seems to be an extended trough. Robust disclosure of results will aid in winning back that trust.

© 2010 Johnson Strategic Communications Inc.

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Buy side: “IR makes a difference”

December 12, 2009

Some CEOs and CFOs don’t believe, in their heart of hearts, that investor relations makes a difference. The numbers speak for themselves, they say – it doesn’t matter if you commit time and resources to doing a good job of IR vs. complying with the minimum requirements for disclosure. So why do IR?

A neat little video on the value of IR surfaced yesterday on Bradley Smith’s IR/PR Product Blog – published by Shareholder.com and NASDAQ OMX. The clip is Brian Rivel, president of Rivel Research Group, sharing a result from a recent survey in institutional investors. What Rivel says about IR:

  • 74% of buy siders surveyed say good IR does has a real effect on valuation.
  • How much does good IR help a company’s valuation? Median answer is +10%.
  • How much of a discount does bad IR impose? Median answer -25%.

Rivel sums up:

So the difference between good IR and bad IR in this environment is 35% of a company’s valuation. So the answer to the question, Does IR make a difference? Absolutely. IR makes a difference.

This is a perception study, not scientific proof of causation. But it’s interesting, considering that buy side investors aren’t overly inclined to dispense praise, to see that they perceive the quality of investor relations as a real factor in valuation.

If for no other reason than the feel-good experience of having someone say your job is worth doing, you should take a look at the Rivel video – and while you’re there, browse Smith’s blog for interesting comments on other topics.

What’s a good price?

August 5, 2009

Clunkers_in_JunkyardClunkers are in the news as part of the government’s weird but popular “Cash for Clunkers” stimulus program. Regardless of its policy merits, I’m pleased not to be in the market for a car right now, buying or selling. For me, anyway, the process is unpleasant – especially getting to the right price, including trade-ins and so forth. Plus clunkers, for now. The price always seems debatable.

Mergers and acquisitions seem a bit like that. As an investor relations person, I’m not part of the negotiating process for corporate deals. Folks who do negotiate the deals earn the big bucks – but that’s OK. My job is to communicate a deal once it’s done. I’ve enjoyed strategizing and helping communicate dozens of deals over the years, so I thought I might share a few ideas on M&A communication.

First, one more thought about clunkers: Buyers and sellers have different points of view in negotiating (and then communicating) a transaction. The pattern is so much a part of human nature that deal making spawned an ancient proverb: “‘It’s no good, it’s no good!’ says the buyer; then off he goes and boasts about his purchase.” The seller, also, has one story in negotiations – “You’re looking at an absolute gem!” – and later brags what a great price he got for the old heap.

Please don’t think me cynical. It’s just that, in communicating an M&A transaction, talking about price is one of the biggest challenges. Is it high, is it low? A windfall for the sellers, a bargain for the buyers? What comparisons can add perspective?

That single number – “How much per share?” – is the most important fact of the whole deal to shareholders of a company that is selling. It’s important, too, for shareholders of the buyer. Other questions about the deal, at least among financial audiences, often seek to shed light on whether it’s is a good price.

So how do we describe the price being offered or paid in an M&A transaction?

  • Realize that communicating a deal is a collaborative effort. Rules often are dictated by the delicate relationship between buyer and seller – and by their lawyers. Both sides have to be able to explain why this is a good deal for them. The lawyers provide cautious language and disclaimers to keep everyone on the right side of securities regulations. How about putting all the parties around a table to hash out key messages for communication? Or connecting the two communication staffs to cooperate on an announcement?
  • When a deal is almost ready to announce, the investment banker is a key resource for communicators who are crafting messages. Regardless of how you feel about i-bankers the rest of the time, they know how to sell a deal – and its price. A financial adviser’s fairness opinion typically is at the heart of formal communications to shareholders. Look for key messages and words in the presentations used to sell the deal to your board, and go from there.
  • Comparisons offer perspective – though picking the right ones can be tricky. The first place everyone looks is the “premium” – what percentage is the offer above the last price at which the target company’s stock traded? But that’s not the only comparison. A stock’s 52-week high is the most common benchmark used in negotiating public-company deals, according to a Harvard B-school study of 7,500 deals cited in the July-August 2009 CFO. If the offer is above the 52-week high, fine; if not, boards are afraid shareholders will balk. Providing the 52-week range is easy and factual.
  • Be prepared to discuss valuation measures. Whether or not you use them in a press release or formal presentation, metrics like multiples of EBITDA or book value (picking the right metrics is industry-specific) help tell the story to well-informed investors who already have a sense of what multiples are fair.
  • On the buying company’s side, consider how the price interacts with hoped-for the synergies, cost savings and strategic quantum-leaps that your CEO will want to discuss. And at least ask the question, “What kind of return do we expect to earn on this investment?” Shareholders like to hear that an acquisition is earnings-neutral, or accretive this year or next. But the bigger question is what’s the ROI or ROE we’re getting for shareholders’ money?
  • Talk about timing. Any deal being negotiated now has a lot to do with the stage of the business cycle – prices are depressed, sellers may be more willing because cash (or credit) is running out, and an expected recovery may figure into the buyer’s rationale for expecting an economic return. This context is relevant for shareholders on both sides.

All of which brings me to the TV game show “The Price Is Right.” You know, the 1950s-style program where contestants try to guess the true value of some consumer item. It’s been around so long Bob Barker had to retire, but the show goes on. Its durability, I think, comes from the fact that people enjoy debating prices and values of things. And that’s certainly true in the market for stocks of public companies – watch the argument triggered by just about any M&A deal.

In preparing to announce a sale or acquisition, therefore, investor relations people need to take price into consideration as a message. It’s a key question in any transaction. And I believe we should try to answer investors’ questions, even before they’re asked, as proactively and completely as possible.

Those are my ideas. I welcome your M&A insights – just click “Leave a comment.”

Risk & return: Is half the formula missing?

August 29, 2008

One thing investor relations people need to improve is disclosure of risks.

I’m not talking about legal disclosures – pages and pages of “risk factors” in the 10-K or Q, from the possibility of bumpy economic times to, God forbid, the unexpected demise of the CEO. These are risk notifications. Yes, they inform investors – especially if one compares the current period to prior years to see what new risk factors have bubbled up – but the language is so, well, lawyerly.

We need to work on explaining and quantifying the business risks that an investor should incorporate in his valuation of our companies’ shares. The market gurus say it’s all about risk and return. But our focus in IR – and the obsession of many analysts – is on the income statement, the return side.

In the classic financial models, risk has everything to do with valuing a company. The stream of future cash flows that people work hard to forecast is discounted by the cost of capital, a subjective number that most analysts simply plug in as a guess. The real cost of capital, or discount rate, is made up of the risk-free return (easy to estimate) plus the risk premium (much harder). You formula buffs, get out the old textbooks or see here or here – and consider what goes into the “d” or “re” term.

As a profession, investor relations people need to work on how to profile risk in a company. Uncertainty is uncertain, but we have some qualitative and even quantitative assessments of risk- from the macroeconomic uncertainties right down to the sensitivities in a product’s sales.

Three recent episodes have started me thinking about risk:

… The massive failure of financial institutions to manage the risks of lending and investing activities, as evidenced by mega-writedowns by banks and I-banks continuing through 2008.

… Another meltdown in a biopharma company’s share price after the FDA called into question the safety of a key product for diabetes.

… The reaction of global markets to Russia’s war-like actions in Georgia, which made investors ratchet up the geopolitical part of their risk premium.

The issue of “miscommunicating risk” was raised this month in the IN VIVO blog, an adjunct to a magazine of the same name that covers deals and business trends in the pharmaceutical and biotech industries. IN VIVO commented:

There seems to be a big disconnect between the seriousness of a safety issue from the regulatory perspective (where a safety “update” by FDA treated two deaths from pancreatitis as important information for prescribers, but not a call to action) compared to the reaction of investors (“The sky is falling!”).

IN VIVO wondered aloud whether the two biopharma companies involved might have headed off the market’s Chicken Little reaction by better disclosing their perspective on the risks in advance, before the FDA turned on its loudspeakers.

In any industry, companies need to work hard at properly communicating risk. IROs should make it a major focus – preferably before the roof starts to cave in.

IR & your company’s market cap

July 28, 2008

In an article on perception studies in IR magazine, Brian Rivel, president of Rivel Research Group, drawing on years of talking to institutional investors about companies and stocks, noted a conclusion on the value of investor relations itself:

We can point to cases that clearly show the impact good IR has on valuation. In our experience, 10 percent of company valuation is tied to truly superb IR. A downside valuation of 15 percent accounts for bad IR. That’s a 25 percent swing, so companies that communicate well attract a much higher valuation.

– Brian Rivel, quoted in Adrian Holliday, “Feedback at a Cost,”
IR magazine, June 2008, p.41