Posts Tagged ‘Institutional investors’

Relationships, not just road shows

September 26, 2015

What makes for a successful IPO? Or sustained capital markets success for established public companies? Discussing the boom (or bubble) in biotech IPOs, an investment banker who specializes in capital formation for that sector, puts his finger on one of the key factors – which applies across industries and company life cycles.

In “A Street-Wise Conversation” in the September Pharmaceutical Executive, Tony Gibney of Leerink Partners, says:

The best management teams focus intently on cultivating relationships with the buy side over years instead of just during the IPO process itself.

handshake_nsfReally, this is true whatever industry you’re in – and whether you’ve been public for 50 years or your IPO is still in the planning stages. Success comes from focusing on relationships, cultivated over time, especially with institutional investors who put money into your sector.

The CEO or CFO whose idea of investor relations is to gear up only when an offering (initial or follow-on) is at hand will walk into buy-side offices on the road show as an unknown – and therefore riskier – story to bet on.

The “known quantity” who has talked to investors for years, provided clarity and insights on his or her company and the industry, developed long-term relationships … That’s the management team long-term investors will want to put their money behind.

© 2015 Johnson Strategic Communications Inc.

It’s the CEO

January 31, 2014

When it comes to interacting with the investment community, Numero Uno is still No. 1. According to a global survey of more than 1,200 investor relations officers by IR Magazine, nearly two out of three IROs (64%) say the Chief Executive Officer is more important than the Chief Financial Officer in relationships with investors.

At least in terms of CEOs’ primary role in investor relations, customs aren’t that different around the globe, according to a story in IR Magazine‘s December 2013-January 2014 issue.

Among small-cap companies, even more IROs (76%) say the CEO is preferred over the finance chief by investors seeking access, while 61% of mid-cap and 59% of mega-cap IROs agree.

According to one European small-cap IRO quoted in the survey:

Investors want to believe in the vision, not in the quarterly figures.

I’ve seen it both ways: companies whose CEOs “own” the story and are the best salespeople for it, and others whose investors would rather talk with the CFO while the CEO stays home to run the business. What’s your experience?

© 2014 Johnson Strategic Communications Inc.

The intangibles investors like

July 1, 2013

Conversations with investors often focus on the numbers, but we also need to give thought to the “soft information” – intangibles. The cover story in this week’s Barron’s, “World’s Most Respected Companies,” provides a pretty good tutorial on which qualitative issues gain the respect of institutional investors. Respect doesn’t always mean a buy decision, but it opens doors.

The direct point of the article is a ranking: Berkshire Hathaway is #1 in a survey comparing institutional investors’ esteem for the world’s 100 largest companies, Walt Disney #2, Apple #3 (down from #1 last year), Google #4 and Coca-Cola #5. No surprises there.

More interesting to me are the comments institutional investors make about intangibles they consider important. The top three qualities that inspire respect, according to the Barron’s investor group, are sound strategy, strong management and ethical practices:

Barrons respect

Those three are followed by other qualities like innovation, competitive edge and growth. In this survey “the numbers” are secondary: Growth in revenue and profit is key for just 5%, strong balance sheet for 1%.

A few of the institutional investors’ comments:

[On Berkshire] “It’s a well-conceived business model, owning good basic businesses, bought at good prices, and managed by great people. A company much to be respected.” …

Does the firm have a defensible long-term business model, and is it built to innovate, compete, and grow? And how good is management, particularly when it comes to capital allocation? …

[On JPMorgan, #45, best of the disrespected megabanks] “How many CEOs would have come out front and center and said, ‘This is my fault?’ … If he weren’t at the helm, you have to think long and hard whether you want to be in this stock …”

“There is value in investing in companies with high integrity. The likelihood is that they won’t do bad things, very bad things, that will affect their stock prices.”

For the investor relations professional, the question is: Are we communicating these intangibles to our investor audiences?

We ought to be thinking about the intangible value-creating qualities as we approach second-quarter earnings (or any season). The message isn’t just this period’s earnings. It is the strategy guiding the company’s business for the coming years, the leadership team’s experience and performance, and whether investors can trust management to deliver on promises.

What’s your opinion?

© 2013 Johnson Strategic Communications Inc.

Are stock buybacks overhyped?

June 19, 2013

Share repurchases aren’t the magic potions some investors and corporate managements think, according to an analysis of Standard & Poor’s 500 companies in the June 2013 Institutional Investor. Stock buybacks can create value, but they can also destroy value – and the actual results suggest some humility in talking up the advantages.

Cash stackSome institutional investors love financial wizardry. Share repurchases automatically increase EPS by reducing shares outstanding – and send a message of confidence in a company’s stock. So financial engineering fans press the idea on a CEO or CFO more than any business strategy, such as investing corporate cash in growth or new product creation.

And some companies love share repurchases. Now Institutional Investor, working with Fortuna Advisors, has begun publishing a quarterly scorecard of how effective stock buybacks actually are, at least in the large cap world. Based on S&P 500 companies that repurchase more than $1 billion in stock or at least 4% of their market cap, the magazine reports rolling two-year ROI for buyback programs.

You can get the overview in “Corporate Share Repurchases Often Disappoint Investors” or dive into raw data in a table detailing ROI for S&P 500 companies with big repurchase programs. (A majority – 268 of the 488 index members that were public for the whole two-year period – bought back at least $1 billion or 4% of their market value.)

The II-Fortuna analysis calculates ROI as an internal rate of return to evaluate investment performance of cash spent on buybacks over two years, including share value increases/decreases and savings on dividends avoided.

Results suggest investor relations people – and CEOs – may want to be more modest in discussing share repurchase plans. The accounting effects of buybacks are assured, but benefits to shareholder value aren’t:

Returning cash to shareholders is supposed to benefit everybody – at least, that’s how the theory goes. Investors who want cash get plenty; shareholders who prefer to stay the course see higher earnings and cash flow per share …

The fanfare that typically accompanies buyback announcements never hints that poor execution can torpedo more value than accounting-based bumps in earnings or cash flow can produce on their own.

Apple is the magazine’s poster child for the disparity between  theory and reality. The magazine dings Apple CEO Tim Cook for his $60 billion repurchase program, the biggest authorization in history, which he enthusiastically called “an attractive use of our capital”:

Buyback ROI reveals a less ebullient story at Apple than Cook described. The company’s -56.7 percent return on buybacks trails those of all S&P 500 companies that compete in the rankings. Every dollar spent by Apple on share buybacks during the two-year period was worth less than 44 cents. …

Trouble is, companies often buy back shares when the price is high – and as we know, stocks go up and down. Timing is everything, at least for returns over a typical investment horizon of two years. Often the timing is wrong:

“During the downturn in 2008 and 2009, even companies with good cash balances didn’t buy back stock, and now they are buying back shares,” says Adam Parker, Morgan Stanley’s top U.S. equity strategist. “A lot of companies have not done a particularly good job of buying low.”

If you’re interested in more analysis, Fortuna Advisors CEO Gregory Milano offers companies some direct advice on how to approach share repurchases in “What’s Your Return on Buybacks?”

I’d love to hear your feedback on buybacks.

© 2013 Johnson Strategic Communications Inc.

Buy side half-interested in social media

June 11, 2013

Just over half of institutional investors are using social media to gather intelligence on companies and industries as part of their research, according to a survey released Monday by NIRI and research firm Corbin Perception.

While 52% of 87 buy-side investors surveyed say they monitor social media – not much change from 56% in a 2010 survey – they are tuning into social channels more frequently. Some 39% monitor social media on a daily basis, up from 12% in 2010. Others check periodically or in response to someone calling a specific post to their attention.

The investors say overwhelmingly (92%) that information from social media isn’t entirely reliable – it’s intelligence that helps fill in the “bigger picture.” But most of those who monitor social media say their investment decisions have been influenced at some point by what they see.

The top three categories of social media watched by the buy side:

On down the line in buy-side usage are company blogs, chat boards, Motley Fool, Twitter and so on. Facebook isn’t in the top 10.

One-fourth of the buy-side people surveyed don’t use social media at all for work, and 38% can’t access social media sites on work computers because of company policies against it.

The bottom line for IR, according to NIRI and Corbin:

As social media continues to evolve, IR professionals must closely monitor company-specific social media content. That said, when it comes to getting their company story our, one-on-one meetings, the investor presentation, analyst days and conference calls remain the leading sources of reliable information, according to the buy side.

Corbin provides a copy of the survey report on its website.

So where are you in monitoring and/or engaging with social media?

© 2013 Johnson Strategic Communications Inc.

3 common mistakes in small-cap IR

December 29, 2012

Small-cap company boards should help CEOs and CFOs face the difficulties of connecting with investors and analysts, governance adviser Adam Epstein argues in a roundtable on investor relations (“Communicating with the Street: Addressing Small-Cap Challenges”) in the Nov-Dec 2012 issue of Directorship magazine.

Here, for example, are three prevalent mistakes that small caps make in IR:

  • “A failure to communicate clearly with an appreciation for the audience [emphasis mine]. … A mix of small, growth-oriented institutional investors and retail investors typically owns shares of smaller public companies, and many lack technical educations and backgrounds. Accordingly, communications with the Street will resonate with only a small portion of investors unless that technology-speak is simplified and more emphasis is given to what most small-cap investors care about—growth and financial performance.” (David Enzer, Roth Capital Partners, small-cap banker)
  • Small-cap habits that “destroy management’s credibility [emphasis mine] and make investors run for the hills and on to the next opportunity: One, a failure to communicate on a consistent, scheduled and timely basis, regardless of whether the news is good or bad. Two, a failure to translate non-GAAP metrics into GAAP metrics, e.g., no one except management knows what ‘orders’ or ‘bookings’ means in terms of revenue. And three, chronically overpromising and underdelivering.” (Timothy Keating, Keating Capital, small-cap investor)
  • “A systemic failure to treat investor relations as a strategic imperative [emphasis mine] … Electing not to put the proper investor relations policies and procedures in place to offer management the opportunity to present a cogent business plan, with proper forward guidance to targeted investors and analysts, will all but guarantee life in the ‘boundary waters’ of Wall Street for small-cap companies.” (John Heilshorn, Lippert/Heilshorn & Associates, IR consultant)

IR is about the basics, in other words. CEOs and CFOs of smaller companies, especially, tend to be so focused on daily demands of running the business that they don’t devote the time or resources needed to communicate well. Where boards can help is by identifying a lack of engagement in IR – and encouraging more. It takes commitment to identify your audience, speak their language and explain who you are. And more commitment to maintain a consistent, proactive outreach.

Although the Directorship piece focused on small caps, commitment to excellence in IR really is the issue with many companies – from micro-cap wannabes to global mega-cap giants.

© 2012 Johnson Strategic Communications Inc.

The public markets’ competitor

May 11, 2012

Q: Do you ever wish you were publicly traded?

A: Oh God, no. I have the greatest job in the world, because I work for a guy who runs the company for the next 20 years, not the next 90 days. It’s tough being a public company, and I wouldn’t wish that on anyone.

 –  Steve Feilmeier, executive VP & CFO
Koch Industries, Inc.

As investor relations people, we rub elbows mostly with publicly traded companies. We think about how to get our message out to the capital markets in competition with other public companies, especially our peers within narrow industry sectors.

But a whole other class of competitors exists in a parallel universe – competitors for capital and, in our businesses, for customers. Maybe we ought to pay attention.

What started me thinking was Steve Feilmeier, CFO of Koch Industries, who spoke this morning to the Kansas City chapter of Association for Corporate Growth. Known to outsiders mostly for media attention in political controversies, on the business side Koch is a $125 billion company with 67,000 employees – the No. 2 privately held business in America. No. 1 in profitability, Feilmeier hastens to add.

Right at the start, Feilmeier says being privately held is a competitive advantage:

We benefit from not having to report earnings every 90 days. All of our decisions are based on, How is this going to work out in the next 10 years?

And it’s working out just fine for Koch (sounds like “coke”). The firm is doubling revenue every five or six years with a dozen operating companies in agriculture, energy and manufacturing. Although Koch doesn’t report publicly, Feilmeier makes it clear those businesses are delivering even better growth in EBITDA (slides here).

An example of Koch’s presence: AngelSoft, its toilet tissue brand, is the No. 1 SKU in Walmart stores. No. 1. Feilmeier says 60 truckloads a day leave Koch’s Georgia-Pacific subsidiary loaded just with AngelSoft four-packs bound for Walmarts.

The ongoing shift in institutional investor preferences among asset classes is the other thing that got me thinking. I keep hearing about pension funds, endowments and real people putting more money into alternative investments – capital that isn’t flowing to publicly held companies represented by IR pros.

Consider these stats: In 2001 U.S. pension funds held 65% of assets in equities, but that dropped to 44% by 2011, according to the Towers Watson Global Pension Assets Study 2012. in those 10 years, the “Other” category in asset allocation – real estate, private equity and hedge funds – quintupled from 5% to 25%. Apply those changes to $16 trillion in U.S. pension assets and you’re talking real money.

Without getting in over my head further on macro views of the capital markets, my point is that public companies ought to think strategically about their investors. Institutions and individuals don’t have to invest in any particular public company. They might even flee the stock market, with some of their funds, for “alternatives.”

And this brings me back to Koch. Feilmeier’s description of why Koch keeps growing at the top line – and especially the bottom line – holds lessons that public companies and IR people might take to heart. A few interesting ideas:

  • Do investors see management-by-quarterly-numbers, or something like Koch’s “patient & disciplined” creation of wealth? How do we discuss performance?
  • Can we demonstrate how our incentive pay turns managers into entrepreneurs, who get paid when they deliver (and not when they don’t)?
  • Do we have real accountability? Koch doesn’t believe in subsidizing any of its businesses, so operating execs are responsible for balance sheets and P&Ls.
  • How do we make decisions? Koch demands rigorous comparison of every capital project with alternatives – will this investment deliver the best return?

Koch, of course, is a giant company. There are well-managed and poorly managed firms of every size in both the public and private arenas. But the principles Feilmeier discussed are common private-equity approaches to driving performance.

Private vs. public is a common debate among CEOs and finance folks. Some private companies long for public status – and a fortunate few make it through the IPO process to get listed. On the other hand some micro-cap and even mid-cap public companies wish they were private, to escape the hassles of quarterly reporting.

Whether public or private, maybe we need to get back to basics of running companies by rigorous disciplines of wealth creation. And public companies need to communicate how those disciplines create real shareholder value.

What do you think?

© 2012 Johnson Strategic Communications Inc.

Investors, this is your day!

September 13, 2011

If you’re not already doing an “analyst day” every year or two, maybe you should be. That’s my takeaway from “NIRI Survey Reveals Current Analyst/Investor Day Practices” – a benchmarking study released Monday by NIRI.

Key finding: 71% of the 431 investor relations professionals responding to NIRI’s survey hold a periodic analyst/investor day. It’s a chance to show off management and tell the company’s story in-depth. After all, you’re locking investors in a room for a half day or full day, so this is “quality time.”

Of course, the larger a company is, the more likely it is to host a regular analyst day. But even among small caps ($250 million-$2 billion), 63% offer a “day.”

Some 70% hold their analyst days in New York or another major investment center, while 40% invite investors in to meetings at a corporate facility, NIRI found.

A few thoughts based on analyst days I’ve been involved with:

  • The CEO and CFO play host and give the strategic overview, but having a half day or more is a great opportunity to demonstrate management’s bench strength by bringing division heads, R&D leaders or operating executives forward for investors to meet them in a fairly controlled environment.
  • It’s also a chance to put on display the chemistry of the management team – showing investors how the top execs relate to each other. Not a bad idea to do this some months after a big merger, to present a unified, compatible team.
  • How often you hold an analyst day is up to you. How fast is the story evolving? If there’s progress every year, annual is great. If this year looks a lot like last, maybe not. (NIRI found 49% of companies who hold “days” do so annually, 35% less often, 12% on an ad hoc basis, 3% more than once a year.)
  • The name “analyst day” doesn’t quite capture the fact that institutional investors are the primary audience. Sure, the sell side attends – but real shareholders and potential investors are the main point of the effort.
  • I personally like the on-site analyst day, giving investors a feeling of seeing the business and kicking the tires, even though they’re carefully shepherded on any tours of the plant or laboratories. But a lot depends on your location. Call up a few analysts or investors and get their input before scheduling your day.
  • Schedule enough breaks to let investors check email, used the phone and visit the restroom. It’s hard to limit your speakers – but, hey, give people a break.

What’s your experience with analyst days? Love ’em? Hate ’em? Any tips?

© 2011 Johnson Strategic Communications Inc.

What’s wrong with this company?

May 31, 2011

A contrarian approach to messaging for investor relations is to ask yourself, “What’s wrong with this company?” Then, in IR reports and presentations, address the weak points of your business – what causes investors to turn up their noses – along with your solutions.

This offbeat idea was prompted by an interview with Anne Gudefin, a stock picker involved in Pimco’s growing presence in the equity markets, in Fortune‘s May 23, 2011, issue. She is a value investor, and like many I’ve talked to Gudefin is looking for stocks that are beaten down – but have upside potential.

“How do you decide a stock is cheap?” Fortune asks. Gudefin says she likes good business models, high barriers to entry and free cash flow. Then she adds:

I also want to see things that aren’t operating perfectly at the moment, so there’s a margin for improvement. I look for there to be a number of catalysts for value to be unlocked. … During the second quarter of last year we bought BP. Because everyone was so negative about it, we were able to buy very good assets at a very cheap price.

Like many on the buy side, Gudefin is looking for companies with a “catalyst for change.” If something’s wrong, the value-oriented investor sees upside potential.

Sure, IR usually focuses on a company’s strengths – great products, competitive advantages, 24-carat gold balance sheet, smart management. We love bar graphs that show a powerful uptrend. We recite accomplishments of each quarter or year.

Maybe IR should look for vulnerabilities. Good investors will find them, anyway. How about bringing issues out in the open? Of course, we won’t title our roadshow presentation “3 Reasons Not to Invest.” But let’s discuss that catalyst for change:

  • Spell out the challenge. Describe the problem objectively, as investors and analysts are likely to see it. Show a capacity for humility, even self-criticism.
  • Define a solution. Emphasize your strategy for solving the problem. The more tangible the actions you lay out, the more you overcome investors’ doubt.
  • Track your progress. Check off actions as you take them. Quantify the progress. Investors will be convinced after a quarter or two of positive results.

Being transparent about problems has drawbacks, of course. Some challenges are tough, they may stretch over several quarters, and you may report a disappointing lack of progress at some stage – or even have to change the strategy.

Think of the really good questions investors sometimes ask. Why are sales flat in your XYZ division? Your gross margin is underperforming these peer companies – how are you addressing that? What business issue keeps you awake at night?

What’s important is that you recognize what is holding back your company’s value and explain to investors that you are implementing a plan to solve that problem. The goal is improving performance that unlock the value for shareholders.

What do you think? Any tips on IR reporting on business problems?

© 2011 Johnson Strategic Communications Inc.

IR is still about the long term

May 12, 2011

Among several bits of wisdom shared by Jane McCahon last night at a NIRI Kansas City meeting is the idea that investor relations, at its core, still has the mission of building a base of long-term investors who believe in your company and its future.

McCahon is VP of corporate relations for Chicago-based Telephone and Data Systems and its publicly traded subsidiary U.S. Cellular. She is a longtime IRO with experience in several industries and is a former chair of the NIRI national board.

Measuring the success of IR isn’t about this quarter, McCahon says. Success develops over several years as you develop a group of long-term investors who understand and support the company’s story.

You can do perception studies to evaluate how the relationships are going. But the ultimate measure will come in a moment, sometime in the future, when you need your shareholders – when management needs a critical proxy vote, support in an M&A situation or buy-in for a follow-on offering.

In that moment, if you’ve been doing your job well, you’ll approach those investors and the answer will come: “We’re with you.”

As for the near term, McCahon says, make an annual IR plan and put it into practice. Focus on what you can control or influence, not what you can’t change.

One IRO asked how you deal with high-frequency trading and the daily gyrations of stocks in today’s hyper-short-term market. McCahon’s advice:

You can’t. What’s your title? Investor relations – not trader relations. Yes, you have to be aware of what it is and be explaining these events to people. But there’s nothing you can do about it – move on.

McCahon says one of the best things an IR professional can do is spend 50% to 70% of your time focusing internally: educating management about investors’ feelings, preparing execs to meet with analysts and shareholders, coming up with Q&As and drilling managers, sharing the IR plan and managing internal expectations.

“What’s changed in IR?” someone asked. Well, this led to a big discussion about fax machines. Too many of us in the room remember when fax machines were the coolest new technology for rapid communication with the market. We punched in fax numbers and waited for it to send. Today, who still owns a fax machine?

McCahon suggests, though, that the heart of IR hasn’t changed: It’s finding and cultivating long-term investors for that moment in the future when you need them.

© 2011 Johnson Strategic Communications Inc.