Seven Ways to Attract Analysts and Investors
from
Spring 2001
by Ann Reilly Dowd
Now that turmoil in the financial markets has knocked
stocks for a loop, companies big and small, venerable and fresh off the
IPO block, are all looking for smart ways to attract—and hold on
to—investors. For those in the old economy that sat out the boom years
with empty dance cards, this quest to catch a potential suitor’s eye is
nothing new. But for the dot-coms and other new economy outfits that
rode the Internet frenzy to dizzying heights only to crash to earth in
the ongoing shakeout, wooing investors is a critical new challenge.
Fail to find investors, and your devalued company could become bait for all kinds of unwelcome suitors, particularly the leveraged buyout firms, some of them familiar, others new faces. Together they are sitting on as much as $400 billion in buying power (see following story).
To get your stock out of the LBOers’ reach means that you’ll need to find a base of loyal investors who’ll stay the course—inevitable downdrafts notwithstanding. The quest will make you part of a crowd. “With the market trading off, we’re much more popular,” says Dawn Simon, who co-manages Merrill Lynch’s Internet Strategies Fund.
Once largely ignored by highflying tech execs, Simon says her e-mail these days is clogged with invitations from technology company CEOs anxious for a dollop of her time to pitch their companies’ potential. Her office in Princeton, New Jersey is cluttered with gifts designed to catch her eye and build goodwill (see box). All fall beneath $50 in value, the limit set by the SEC to remove any suggestion of bribery, but, as Simon notes, the items serve as a friendly overture. “If a company understands investors’ pain during volatile times and responds, it builds confidence and attracts more loyal investors,” she says. “It’s a whole new cycle.”
Behind Simon’s sudden popularity is not just another down market, but the first to hit amid big changes in the way the financial markets work. “This is no longer a game of wining and dining a couple of dozen analysts as a way of taking care of the large shareholders who control your stock,” says Howard Kurtz, the Washington Post’s media reporter and author of The Fortune Tellers: Inside Wall Street’s Game of Money, Media and Manipulation. “A lot of 401(k) types can now trade as quickly as the folks at Goldman Sachs and Morgan Stanley. They watch CNBC and check TheStreet.com, CBS.MarketWatch.com and other websites. A company thinking about investors has to worry about reaching these individuals as well.”
Other gale-force winds are adding to the volatility of the market and to the vulnerability of stocks. Among them: the power of the financial press to whipsaw stocks 24/7, the media-stoked competition among analysts to make headlines with upgrades and downgrades, the heightened pressure on portfolio managers to perform in a down market, and, newest of all, Regulation Fair Disclosure. Reg FD, as it is known, is the Securities and Exchange Commission’s new rule that requires all companies to release to analysts and average investors simultaneously material information that could affect the value of their shares. “Previously, companies could ease expectations over a period of several weeks by talking to analysts,” says Robert Morris, Goldman Sachs’ head of global investment research. “Now it hits all at once. You get much more precipitous stock moves as a result.”
What’s a board member to do? Whether your company’s hot, a fallen star, or never really got off the ground, the message from investors is the same: Show me the money. Rule number one, two, and three is meet or beat expectations. Nothing will implode your stock faster, or secure it in concrete more permanently, than failing to deliver on earnings or other major goals. Microsoft, Dell Computer, and other corporate giants demonstrated that lesson all too well late last year when they scaled back their revenue estimates for 2001 and put their shares into free fall. But companies can survive and prosper, even in the face of short-term disappointments, provided they communicate their long-term value proposition—and their capacity to deliver on it—in a clear, consistent, and compelling way.
If your company is big or in a hot sector, a key to success will be impressing Wall Street analysts. Their reports and recommendations not only influence institutional investors, but they also increasingly move the retail market with their widely reported stock ratings. (See box on page 29 for how some analysts came across their greatest hits.) Analysts are tough to reach, however. “If a company is smart, it will send me a whole package of information right away, including anything other analysts might have said about it,” says Stephen McClellan, computer services analyst for Merrill Lynch.
Better be ready for that analyst’s call. You’ll probably only get one shot, and analysts may take time only if they can get right through to the people with the answers. Otherwise, forget it. If you’re too small or out of vogue to get the analysts’ attention, you need to get around them. And you can. The explosion of financial media, from CNBC to The Motley Fool and other online investor sites, gives corporations a whole new avenue to reach investors. Your own investor relations people, or any of the large number of investor relations firms out there, can help you line up on-camera appearances. (See page 31 for 10 of the biggest IR firms.)
Herewith, in more detail, are seven ways to catch and nurture loyal investors and how various companies have made them work:
TELL A CONSISTENT, CREDIBLE TALE
The days when putting a dot-com after your name could send your stock into prolonged flight are long gone. Last year’s flood of IPOs has slowed to a trickle. Many hot companies like Pets.com have crashed and burned. Others, like Outpost.com, which once shot gerbils out of a cannon to attract attention, are wobbly. In today’s show-me market, companies need to articulate their long-term vision clearly and often—and be just as articulate about how they plan to achieve it.
Remember, you’ll be one of many clamoring for attention. “It’s more and more important to differentiate yourself,” says Bob Joyce, head of investor relations at FitzGerald Communications in Boston. “Wall Street wants to see earnings in the short run, a solid, long-term growth strategy, and a quality management team that can take the company through the pitfalls. Your strategy has to be clearly expressed and you need proof points—things that establish you are going in a good direction. They could be customers, revenues, earnings, new technologies. But investors want to be convinced.”
Great Plains Software, a leading supplier of midmarket business applications in Fargo, North Dakota, demonstrates how this can be done. A warning last year that its earnings would be lower than expected poked a hole in its share price. Many companies would have dived for cover, but Great Plains went on the offense. Senior management hosted a conference call open to all investors to explain that this was just a “hiccup.” CEO Doug Burgum took it on the chin in an interview with CNBC’s “Squawk Box” host Mark Haines, admitting the company had missed its target. Within a month, the company released a major upgrade of its flagship product. Meanwhile, the company’s public relations team managed to get reporters to look at other aspects of the company. The Wall Street Journal ran an article on Burgum’s adventurous management style—and his fascination with such explorers as Marco Polo and Lewis and Clark. “We wanted investors to look at the company in terms of criteria other than financial results, like its unique culture and strong management,” says FitzGerald’s Kim Miller, who advised the company on its PR strategy.
It paid off. By December, after Great Plains announced it would meet its second-quarter earnings goals, the stock, which had recently dropped to $20, began to rise in value. CNBC’s Haines invited Burgum back for a follow-up on the stock’s turnaround. A few days later, Microsoft announced its intention to buy the company for $1.1 billion, which valued Great Plains stock at $45.65 per share.
TARGET YOUR AUDIENCE
Face it, not everyone wants to buy your stock. The trick is finding investors who do—or should. “First you need to do some soul-searching,” says Eileen Morcos, managing director of Hill & Knowlton’s Financial Communications Practice. “Look at your institutional shareholder base. Is it a growth story? And can you maintain that growth story? Are you producing well, quarter over quarter? Because if you’re not, you know they’ll dump you. I’m working with a company now whose market cap dropped from $1 billion to $500 million in less than a year. It had been targeting growth investors. We’re now pitching it as a value play.”
The smartest companies target investors continuously, beginning with their pre-IPO road shows. Consider how Juniper Networks, an Internet infrastructure company that went public in 1999, went about it. Juniper’s CEO Scott Kriens wanted only patient and committed investors, people who would buy when the share price fell and not run. During its road shows, Juniper graded potential investors on a scale of one to 10 in terms of the quality of their questions, the size of their portfolios, and their previous behavior with other companies. Only those with the highest scores got stock in the oversubscribed IPO, and the company used the same system in subsequent offerings. Like most tech stocks, Juniper had a tough 2000; even so it ended the year nearly triple its IPO price.
It’s important to keep enlarging the investor base as a company matures. Start with your initial investors—investment banks and their in-house analysts. Like it or not, the surest way to get analysts to cover you is to use their firms to issue your stock. Although the regulators insist on a Chinese Wall between investment bankers and their firms’ research departments, sell-side analysts—those employed by brokerage firms and research companies to predict future earnings per share, maintain recommendations on the stocks, and look for possible investment banking opportunities—typically cover the companies their firms took public, and often generously. But smart companies make their sell-side analysts work for them. “Make sure the boys who brought you to the dance are still dancing with you,” says Philip Barton, CEO of InvestStation, a Boston IR firm for online investors. Adds Morcos: “Remember those firms took 7% to take you public. If they have a big retail network, get the sell-side analysts to set up road shows for your management team with their brokers.” The IR person should call their contact at the firm and ask for help. One approach might be to say, “Our management team will be in your town next month and would love to visit investors. Would you ask your sell-side analysts to set up some appointments for us?”
Then build out your shareholder base further by targeting buy-side analysts—these folks look for stocks to invest in—who own or cover your competitors. “You want to target folks who understand your industry and are holding your peers,” says Morcos. “The idea is to understand why they are not buying you. If it’s because your stock price is relatively high, then you know the next time it dips, you can call them. If it’s that they don’t trust your management or don’t understand your strategy, that’s another thing. Either way, you’re building a valuable pipeline of support and intelligence.” As for big institutional holders, e-mail or call them directly and regularly set up personal meetings. Says Goldman’s Morris: “You’re always going to need a line open to your major investors.”
MAKE YOUR CEO YOUR STAR STORYTELLER
There is no better messenger than your CEO, though the CFO can be a close second. Institutional investors expect quality time with the top brass and both “need to be out there quarterly talking to shareholders,” says Morcos. “In one form or another, they should be spending 40% of their time on investor relations.” That means a major commitment to investor conference calls, presentations at banking and industry conferences, in-person visits to major shareholders, and last but hardly least, media appearances.
A longtime champ of this game is General Electric’s Jack Welch. To be sure, his management of GE has been masterful, but his artful handling of Wall Street and the financial press has made him a media icon. His greatest strength: an ability to articulate the company’s complex value proposition in simple, clear terms and to deliver consistently on his predictions.
You don’t have to be a celebrity CEO to be convincing. Last year, Emulex, a manufacturer of fiber optic channel adapters, was hit with a triple whammy. News got out that the SEC was investigating the company, its CEO was quitting, and earnings would be restated. As it happens, it was all untrue. Nevertheless, the stock dropped more than 60% in minutes. CEO Paul Folino went on an immediate offensive, using press releases, phone calls, and TV interviews to deny the reports. The stock rebounded.
Even if the facts are damaging, it is important to have your CEO out there addressing them. “The story will get covered one way or the other,” says Dave Marino-Nachison, a producer for The Motley Fool website. “The less conjecture and hypothesizing you leave for the media, the better for everyone.”
BUILD A CHOIR OF SUPPORT
Reg FD has democratized the information flow between analysts, institutional investors, employees with 401(k)s—and any Joe Six Pack with an E*Trade account. If you play it right, you’ll have them all singing the same tune.
Chevron showed how to communicate effectively with a disparate group of investors, and win almost all of them over to your side, when it bid for Texaco last year. Announced against a backdrop of rising oil prices and fears of energy shortages, the proposed merger between two oil giants could easily have become the poster child of greedy Big Oil gouging consumers. Instead, the merger was received positively by a chorus of politicians, media, customers, and investors, and the regulatory review appears to be proceeding without problems. Shareholders in an acquiring company typically see their stock drop 10% to 15% if the merger is well received and up to 40% when it’s not. Chevron’s stock dropped less than 3%. Says Joele Frank, of the eponymous IR firm in New York City, who worked on the merger: “Everyone understood the story, and they loved the combination.”
That reflected meticulous planning in the months leading up to the announcement—and open communication with investors the moment the bid was official. The two companies not only held an analysts’ meeting, which is common on such occasions, but in the spirit of Reg FD (which had just taken effect) they also invited the press to sit in. Investors could watch the analysts’ meeting on their computers via a live webcast. The CEOs and CFOs of both companies did a press teleconference call and many one-on-one interviews. The companies also launched major communication efforts to sell employees and customers on the deal. Shortly after the announcement, the CEOs hit the road to meet with major institutional investors in Boston and New York City, as well as editorial boards there and in Washington, D.C., where politicians and regulators live.
In all, the message was the same: that this merger would be good for shareholders, consumers, employees, indeed, the nation, since it would help reduce America’s dependence on foreign oil. “This could have been a USAir-UAL deal,” says Frank, referring to the controversial airline merger proposal that raised hackles all over, including in Congress. “But we only got positive stories. We are off to a good start.”
MAKE DISCLOSURE YOUR FRIEND
No matter what type of investor you aim to woo, full, fair, and fast financial disclosure is a must, and not just to avoid the wrath of the regulators. “The more credibility a company has, the lower the risk premium and the higher the valuation,” says Goldman Sachs’ Morris, who manages 450 equity analysts worldwide. “What builds credibility is open access—and that you deliver on what you say you are going to deliver on.”
If you have any doubt, consider the cautionary tale of one Wall Street darling, Gemstar-TV Guide International, the largest distributor of software for interactive television program guides. Its stock fell 18% in one day last year after it issued a terse announcement of a second-quarter loss with little explanation. “For some reason, the company thought it had given investors enough, but investors said ‘not enough’ and voted with their feet,” says Merrill Lynch’s Simon.
Startled, management hastily released the full financials and held a conference call to answer investors’ concerns. The stock rebounded, but not without leaving some gray hair among top management. “If the trust is not there, the stock will sell off,” says Simon. “And a key way to keep the trust is to provide a complete and consistent flow of information.”
Indeed, many technology companies with complex business models or short-term losses have taken disclosure to new frontiers, creating innovative performance measures to help sophisticated analysts and average investors alike see how their business is doing. Siebel Systems, an e-business applications company in San Mateo, California, publishes how many dollars customers save by installing its products. AOL posts on its website how many subscribers it has, usage per member per day, instant-message hits, and more. The Amazon.com website announced the company’s Christmas sales on a real-time basis.
USE THE MEDIA AS YOUR MEGAPHONE
The media can prove to be your best friend, or worst enemy, and courting members of its ranks is a key to attracting investors. Make it your business to know which publications or TV or radio programs cover your industry and what sort of news they are looking for. Don’t look to Fortune to respond to a breaking story or choose an investigative consumer reporter to cover a corporate management tale. Get to know editors and writers, and tailor your pitch to the messenger. Then be ready to adjust to his or her particular needs. Appearing in part of an article already in the works may prove a better short-term strategy than waiting for one that is all about you.
In the universe of financial media, the Washington Post’s Kurtz calls CNBC “the 1,000-pound gorilla of market-moving news” and the place to be when good or bad news about your company is breaking. “The truth is, there is CNBC—and everyone else,” says Kurtz. “If I had a positive longer-term story, I might like to see it in the Wall Street Journal, which remains the financial bible of the print world. Or if I had a feature story that changed the company’s image, a home run would be to get it in Fortune, Forbes, or Business Week. But if I needed to respond to something quickly, CNBC is at the top of everyone’s list because it has become so influential. All the brokerage houses have it on all the time. So do most gyms. It has a real cult following.” CNBC’s Tyler Mathisen explains how: “Guest bookings come about in one of two ways. We call them, because we’re looking for a guest to talk on a newsworthy topic. Or they call us, because, say, a company has a new product or an earnings report they want to talk about.” (See box on opposite page on how to ace your CNBC appearance.)
PLAY OFFENSE—AND DEFENSE—ON THE WEB
There is a fine line between legitimate marketing and touting your stock in this new media. Cross it, and you could easily find yourself the target of a painful government investigation. And as the box on page 35 shows, scam artists are out there who could well lead you down this unfriendly trail. Still, few companies are maximizing the power of the Web as a way to build a two-way communication system with investors.
Unfortunately, says Nell Minow, founder and editor of thecorporatelibrary.com, a website offering investor information on corporate governance issues, “most companies still think of their websites as marketing tools for products and services, not investor information.”
For inspiration on how to do it right, check out www.emc.com/ir. Here’s where Internet storage giant EMC shows its stuff. The company provides a user-friendly way to track basics such as stock movements, SEC filings, and the latest company news. One reason EMC has remained an investors’ favorite is that it has managed to maintain its premium prices while competitors have sliced theirs. Says an admiring Hill & Knowlton’s Morcos: “Its market leadership is showcased on its website and is part of a consistent shareholder relations strategy.”
But companies also need to know how to use the Web defensively. “Financial message boards and chat rooms offer the best opportunity in history to find out what shareholders are really thinking about you,” says Minow. “That doesn’t necessarily mean that if you find critics on some message board, you say, ‘Hey I’m the corporate secretary and here’s why you are wrong.’” Indeed, most investor relations experts advise against that kind of in-your-face approach. But knowing what your critics are saying can help you decide how to get your own message out. Remember that corporate raiders, LBOers, and other types of unwelcome investors are using the Web, too, and they are preying on weakened companies. The best defense is a strong stock, or, if not, a strong story that convinces investors that your low stock price is just a temporary problem, and that strong management is on the case to maximize shareholder return. Having a proactive investor relations operation that gets that message out to nervous shareholders is key. You want them to believe that your management has a better plan for making them rich than Mr. E-raider from cyberspace.
Luby’s, a restaurant chain, learned this lesson the hard way, after Les Greenberg, a California lawyer, posted a complaint on a Yahoo! message board about the company’s collapsing stock. Greenberg attracted some powerful supporters, including several former vice presidents, and used Yahoo! to make a bid for control of the board. (See “Get Outta Here” on page 54 for how the story turned out.)
These seven strategies can help any company get out the word on its
business and where it’s headed. The key to wooing investors is ongoing
communication with them. That, in itself, may well turn out to be a
company’s most attractive asset.
