- Shopping Bag ( 0 items )
Using Investor Relations to Maximize Equity Valuation
"Ryan and Jacobs provide a much-needed and valuable road map that should help CEOs and CFOs navigate the capital markets landscape. Not only do they address the traditional Investor Relations responsibilities, but also the often misunderstood relationships between the sell-side analyst, investment bankers, capital markets, and buy-side investors that company management often don't see."
—William Schmitt, Senior Equity Analyst, CIBC
"By employing former analysts as investor relations specialists, Integrated Corporate Relations (ICR) has raised the bar in the investor relations field."
—Patrick McCormack, CFA, Portfolio Manager, Tiger Consumer Partners, LP
"The team at ICR has created an important, strategic, value-added service for management teams as well as Wall Street investors and analysts. Their capital markets experience, vast sector knowledge, and wealth of relationships allow them to play a dynamic role that is unparalleled in the investor relations and corporate communications industry."
—Joe Teklits, Director, Sr. Research Analyst—Apparel and Retail, Wachovia Capital Markets, LLC
"We've found that ICR truly delivers superior, strategic investor relations counsel due to their high-level capital markets backgrounds. They assess every situation with an eye on long-term equity value, and for that reason, their viewpoint syncs perfectly with our Board of Directors and management. Unlike many firms that claim superior knowledge in the field, ICR actually wrote the book."
—Rick Rosenfield, co-CEO of California Pizza Kitchen
Preface: A Brave New World of Investor Relations.
Introduction: A New Approach and Why It’s Important.
PART I: CAPITAL MARKETS AND ITS PLAYERS.
Chapter One. The Capital Markets and IR.
Chapter Two. The Sell-Side Disclosed: Who They Are and What They Do.
Chapter Three. The Buy-Side: Institutional and Retail Investors.
Chapter Four. Employees, Suppliers, Customers.
Chapter Five. The Media.
Chapter Six. Global IR.
PART II: POST BUBBLE COMMUNICATIONS; Events In The Markets and The New World of IR.
Chapter Seven. Greed Is Good—90's Style.
Chapter Eight. Of Rules and Regulations.
Chapter Nine. Post Bubble Reality.
Chapter Ten Of Reason, Renewal and Honesty.
PART III: INVESTOR RELATIONS: THE FUNDAMENTALS; Traditional IR And The Need For Change.
Chapter Eleven. Traditional IR: What It Is, and Why It’s Not Enough.
Chapter Twelve. Staffing and Sourcing The New IR.
Chapter Thirteen. Grasping The IR Evolution.
PART IV: INVESTOR RELATIONS: MAXIMIZING EQUITY VALUE.
Chapter Fourteen. Positioning IR to Succeed.
PART V: DEFINITION.
Chapter Fifteen. The IR Audit.
Chapter Sixteen. Excavating Value Post Audit.
PART VI: DELIVERY.
Chapter Seventeen. From Definition To Delivery.
Chapter Eighteen. To Guide or Not to Guide, That Is the Question.
Chapter Nineteen. Targeting the Audience.
Chapter Twenty. Integrating with PR.
Chapter Twenty-One. Infrastructure/Disclosure Check.
Chapter Twenty-Two. Delivering The Goods.
PART VII: DIALOGUE.
Chapter Twenty-Three. From Delivery to Dialogue.
Chapter Twenty-Four. Maintaining and Building Relationships.
Chapter Twenty-Five. Meeting The Street.
Chapter Twenty-Six. Event Management.
Chapter Twenty-Seven. The Banker Mentality.
Conclusion: A Call for Change.
Appendix A: Two Press Releases.
Appendix B: The Conference Call Script.
Appendix C: Velocity Inc. 2004 Investor Relations Plan.
No public company operates in a vacuum. In fact, many people, including regulators and competitors, generate opinions that can affect a company's position in the capital markets. Every decision a company makes, whether financial, strategic, or operational, ripples into the capital markets and affects the stock price, the competitive position, or the public's perception. Anticipating and assessing the impact of corporate actions on the capital markets, whether from an acquisition, a change in dividend policy, or a new product introduction, is the function of investor relations (IR).
The underlying premise of the capital markets is to connect those who have money with those who need money. However, this match must be made in a mutually beneficial manner. To that end, the sell-side, the middlemen and -women, must bring quality companies that need capital to Wall Street to sell equity or debt to the buy-side, managers of trillions of dollars in capital. What about companies that already have money and want to grow? They seek out the sell-side, who can help them acquire or divest of businesses or divisions. These transactions too must be beneficial to the buy-side, and to ensure that value is created, shareholders must approve these actions.
So who are the sell-side and the buy-side? The sell-side is madeup of firms like Goldman Sachs, Bank of America Securities, S.G. Cowen, Wachovia, RBC Securities, Merrill Lynch, and Piper Jaffrey, to name a few. They are known as investment banks or brokerage firms, and they employ bankers, institutional salespeople, traders, and research analysts. The buy-side is composed of investors. The majority of these are institutional or professional investors, like Fidelity, T. Rowe Price, and Wellington Management, and they control huge amounts of money, usually from funds, endowments, or pensions. Simply put, they are true professionals who invest on behalf of their clients. Other investors include individuals who put their own money into the capital markets pot.
Generally speaking, companies that need money can get it in one of two ways. They can take it in exchange for a piece of the company-that is, they can sell equity or ownership, by giving the investor shares of stock in the company. Or they can borrow the money, and pay it back to the investor with interest, selling the investor debt-for example, bonds. On the other side of the equation, those who want to invest their money can do so, again generally speaking, in either stocks or bonds, and there are usually specialists in each area. (Of course, hybrid financing vehicles, like convertible bonds, are an option, but this discussion focuses just on equity and debt.)
Equity shares can be traded publicly on either the New York Stock Exchange or The American Stock Exchange, which are open auction floors, or the NASDAQ and Over-The-Counter exchanges, which are buyer-to-seller negotiated systems. Debt trades publicly on the bond or fixed income markets. A company that has equity or debt that trades publicly is subject to the rules and regulations, significantly augmented and expanded in recent years, of the Securities and Exchange Commission.
INVESTOR RELATIONS, TAKE 1
Publicly traded companies are required to provide certain information to current and potential investors. This information includes mandated SEC disclosure documents, such as annual reports, 10-K filings, proxy statements, quarterly 10-Q filings, and 8-Ks that announce unscheduled decisions and actions. Additionally, there are the day-to-day goings-on of the company, marketing strategies, operational decisions, acquisitions, and general business fluctuations that, if deemed to be material, can be shared with investors.
All of these communications are supported by other vehicles such as press releases, conference calls, and management presentations, whether live or Web cast.
In most cases, the packaging and distribution of this information is the responsibility of investor relations, as IR is the filter through which all financial communications come out of the company. (See Figure 1.1.)
Companies have either an IR department or an executive designated with IR responsibilities, and many companies supplement the IR function with outside IR counsel. IR counsel, either internal or external, not only administrates disclosure responsibilities but, in a perfect world, works to preserve or enhance the company's equity value. IR counsel steeped in capital markets know-how and industry-specific knowledge understands the cause and effect of stock movements and incorporates that knowledge into all strategic communications plans.
Stock price, or equity value per share, moves up and down on company-specific financial results, macro- and micro-economic influences, and investor perception of the company. Digging deeper, however, stocks move for two main reasons: performance, both past (actual) and future (expected), and the way that performance is communicated and perceived.
A buoyant stock price is critical for any company because it can create opportunity in the form of a second currency beyond just cash to buy other companies. It can also attract the best employees and vendors and improve the morale of the entire organization. Many institutional investors only invest in stocks with large market capitalizations-that is, greater than $1 billion, and sometimes $5 billion. Many investors focus only on large caps because they view them as having less risk, less volatility, and more liquidity, which allows big investors to buy and sell rapidly without moving the market. Correspondingly, companies want institutional investors to buy stocks because they usually buy large amounts, increasing liquidity and modifying volatility.
Companies with fewer shares outstanding often have to fight for exposure and awareness and work hard to support the continued buying and selling of their shares. Standing out among thousands of publicly traded companies and increase trading volume should be one of the aims of IR. Exposing the company to a wider range of shareholders can also attract the sell-side, which, from an investment banking perspective, views a high equity price as an opportunity to acquire assets for stock rather than cash or sell more equity to the public to raise cash for operations or debt reduction. All of these options or opportunities derive from a high stock price and are examples of a low-cost transactions that benefit shareholders.
COST OF CAPITAL
Though the long-term value of a company's stock correlates 100 percent to financial performance, a company's daily, monthly, or yearly stock price is important because it determines a company's cost of capital, and cost of capital is real money. As everyone knows, it costs money to get money-usually in the form of interest payments, or selling a piece of the pie. The cost of debt, or borrowing, is interest paid, and the lower the interest, the lower the cost of capital. The cost of equity is the price that investors are willing to pay for each share. In this case, the higher the price per share, for a constant earnings number, the lower a company's cost of capital, because the company will have to issue fewer shares to raise the same amount of money.
These relatively simple concepts can have a significant impact on the capacity of companies to generate profits and remain competitive. Keeping cost of capital low should be a major concern to CEOs and CFOs in running the business and creating shareholder wealth. It's a fiduciary obligation.
THE VIRTUOUS CYCLE OF A HIGH STOCK PRICE
If the cost of capital is determined by a company's equity value, it's pretty important to maximize that value at any given time. Beyond financial returns, it energizes employees, partners, and vendors; supports important strategic activities; influences the media; and creates a superior return on investment to that of one's competitors. This becomes a virtuous cycle. (See Figure 1.2.)
Strategic and consistent communication and outreach can have a significant and positive influence on share price, and therefore the price-to-earnings ratio or any other valuation method. This is because one multiple point on a company's market value can be worth tens, or even hundreds, of millions of dollars. For example, if a company's stock price is $60 and its earnings are $6 a share, they're trading at a P/E of 10. If they have 200 million shares outstanding, the total market capitalization is $12 billion. If the multiple goes up just one point, to 11, the stock trades at $66 a share, and the market cap is $13.2 billion, a $1.2 billion increase in value from one multiple point. Strategic positioning and outreach can accomplish that expansion.
VALUATION-THE OBVIOUS AND THE NOT-SO-OBVIOUS
There are many different types of investors with many different objectives. Some want growth and look for stocks with high returns and earnings momentum. Others seek value and purchase stocks they feel are undervalued and underfollowed by Wall Street. Another type of investor wants income, like stocks with a dividend.
Regardless of the differences, most investors take the information they are given and run it through quantitative models. Then they compare the results to other companies in the same industry and make an investment decision based on these relative quantitative indicators. This is basic information easily culled from a company's financials, which must be disclosed on its income statements, cash flow statements, and balance sheets. Anyone can get these and do their modeling.
Then there are the intangibles, which is where IR needs to be at the top of its game. The intangibles are the nuances of value, the managing of expectations and perception, and the ability to define, deliver, and create a dialogue about a company's financial performance and position in its industry. In fact, intangibles are an important component of maximizing value. Anywhere from 20 to 40 percent of a company's valuation is linked directly to these items. That's a big piece of the valuation pie, and the job of IR is to help management maximize it and investors understand it. (See Figure 1.3.)
AIR TIME FOR THE PRIVATE COMPANY
Regardless of whether a company is traded publicly, or its stock is held by private investors unable to sell the shares on public exchanges, having a voice in the capital markets is important. Many private companies wait until they are considering going public-that is, offering their shares to the public via an initial public offering-before they incorporate IR into their strategy. This is a missed opportunity for private companies to build relationships with Wall Street and, more importantly, to create a distinct advantage and gain a competitive edge in their industries.
The opinions of capital markets professionals, particularly analysts but sometimes portfolio managers, are often quoted by the media, and the media is an integral force in shaping public perception and forming a company's reputation. Therefore, in order for private companies to have equal representation in the public eye, they have to be at least a twinkle in the eye of the capital markets. They have to get their message and mission across so that it is well-understood and incorporated into the points of view of The Street. An IR strategy is of great value to the private company in putting the message out there.
A private company has the best of both worlds. Privates can talk to the world, make predictions about themselves and the industry, and potentially affect their competition's perception and cost of capital, yet never be held to the regulatory accountability that comes with life as a public company.
INVESTOR RELATIONS, TAKE 2
Providing the necessary disclosures and information is one thing. Knowing what Wall Street expects from a company and its management team is something else entirely. The best IR professionals are inside the brains of their investors, and think like analysts and portfolio managers. By understanding valuation they can approach analysts and money managers as peers and work hard to build trust.
IR can directly improve the 20 to 40 percent of a company's valuation linked to factors outside of financial performance and bolster market capitalizations while increasing exposure and obtaining valuable third-party validation. There is a science to valuation, but there is also an art.
Though the uninitiated may believe that investing is a game of chance, few intelligent investors act with this understanding. Professionals on the buy-side have too much responsibility for too much money to invest aggressively with management teams that don't understand Wall Street. Investors need to believe that they will get good and relevant information clearly communicated by the company, and that the CEO and CFO understand the capital markets and how to properly circumvent issues that could be detrimental to equity value in the short and the long term.
Premium valuation results from not only strong performance, but also because of a belief in management, which reduces uncertainty. Lower risk perception means higher value, and IR can be a key factor in this equation. CEOs and CFOs should seek to establish this credibility and trust with all communicated events. It's an insurance policy on shareholders' personal wealth and management's reputation.
Companies are expanding their communications to foreign sources of capital, and investors are culling a global range of investment opportunities. In this arena of global exchange, specific investor relations expertise distinguishes itself.
IR professionals with extensive relationships and a wide range of capital markets know-how can extend the reach to find the right investor well beyond the company's home shores.
* When is the time to think about marketing to overseas investors?
* How will you know if overseas investors will even care?
* Will the story translate?
Roam from Home
Investing can be precarious and risky from the outset. Add an ocean, a different language, a distinct currency, and cultural idiosyncrasies, and the uninitiated might consider it speculative. Generating interest from international funds that invest in U.S. equities requires knowledge of the funds' investment guidelines. Many international funds, similar to those in the United States, publish their investment outlines on their Web sites, and this information is also available from institutional investor databases, such as Thompson Financial and Big Dough.
Excerpted from Using Investor Relations to Maximize Equity Valuation by Thomas Ryan Chad Jacobs Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Posted July 4, 2006
Authors and consultants Thomas M. Ryan and Chad A. Jacobs, cofounders of an investor relations consultancy, provide a basic introduction to the ways of Wall Street that will be useful to new staffers in investor relations (IR) departments, or to companies that are deciding how to handle IR. The most valuable part of the book comes in chapter 20, where the authors offer companies a good guide to handling earnings releases and stock analysts¿ conference calls. The least valuable part is the oft-repeated advice to companies that they should hire investor relations consultants - like the authors. We suggest this book to companies that are defining their investor relations function
1 out of 1 people found this review helpful.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.