CHAPTER 12 Grasping the IR Evolution

The difference between traditional IR and this book’s view of IR is the difference

between hope and control. Both approaches incorporate basic IR

functions, but traditional IR more than the present approach hangs its hat

on chance. In other words, the approach advocated here gives the dice to the

high rollers and bets with the house. Part IV shares several specific strategies

that IR should employ to mitigate risk and position the company to maximize

valuation.

Any company that does not approach the IR function as critical and

strategic is not acting in the best interest of its shareholders. Now, of course,

some smaller companies are so focused on their bottom lines that they refuse

to believe they can afford a sophisticated IR effort. Yet these same companies

have armies of lawyers, consultants, and accountants. IR is right up

there with those professional service providers and equally, if not more, important

as it relates to valuation issues.

Accordingly, the cost of any IR effort, no matter how sophisticated, is

nominal relative to the prospect of damaging the company’s valuation by

even one multiple point—a penalty that would, for example, translate to

$50 million of value for a company with 50 million shares outstanding.

OUT WITH THE OLD

The stakes are extremely high in corporate America today, and the payoff

can be equally great. That’s why every company, big and small, public and

private, needs to infuse a more sophisticated approach to their IR programs.

The new IR is a voice to and from the stock market, interpreting

the signposts, negotiating the hazards, and picking the best routes (see

Table 12.1).

TABLE 12.1 The New IR

Traditional IR New Approach

Strategy Supports strategy and makes sure it’s Helps create strategy, with the benefit

communicated to the key players. of understanding its impact on the

markets.

Story Crafts and communicates an investment Crafts, communicates and helps create

thesis based in operations and marketing a complete investment thesis that

strategies. Built from the executives’ hinges on valuation. Shuns promotion.

perspectives, sales-oriented. (See box on Dress Best Shops.)

Stock market reconnaissance Maintains a dutiful eye on the stock Understands valuation and daily market

market. volatility. Can discern if fluctuations are

are due to buy-sell imbalances, or

correlated to the underlying

fundamentals of a logical peer group.

Shareholder analysis Tracks stock ownership, names, and Tracks investors. Also creates investors

amounts, through any number of by looking at multiple comp groups

available databases and resources. based on size, business model

characteristics, balance-sheet strength

and valuation.

Approaching analysts Knows the value of analysts, but often Makes sure that guidance is set

approaches them qualitatively. conservatively and the story is

“packaged” properly before

approaching anyone. Mitigates risk.

Grasping the IR Revolution 81

TABLE 12.1 (continued)

Traditional IR New Approach

Feedback Considers feedback an important part of Has peer reltaionships with bankers,

the job. Success is based on peer analysts, and portfolio managers. Those

relationships in the capital markets relationships are driven off the ability

which may or may not exist. to talk valuation.

The CEO Supports the CEO, helps senior Provides senior, strategic, peer counsel

management sell the company strategy, to the CEO. Both cheerleader and

and provides information from The devil’s advocate. Coaches the ego out of

Street and the market as they know it. management. Comes in at strategy

creation to advise on best possible

choice for shareholders, and helps the

board quantify decisions and educate

The Street.

Managing the event Reactive, at least from an analyst’s Creates the company story and defines

perspective. Lacks experience or it with analysts before anyone has a

information to be proactive. chance to write it. Specific, conservative

guidance to control, in as much as

possible, the variables. Sophisticated

targeting to attract new buy-side and

sell-side blood.

TABLE 12.1 (continued)

Traditional IR New Approach

Smaller caps N/A Knows no public company can ignore

Some micro caps, small caps, and mid- IR. Uses conference calls and other

caps conduct IR as an afterthought. cost-effective strategies to enhance a

When regulations were more lax, did company’s multiple, which can mean

little more than bare necessities, such as millions of dollars for company value

SEC disclosures and annual meetings. as well as other benefits that far

outweigh the cost.

Private companies N/A Knows that a voice in the industry is

Most private companies do not have invaluable and that analysts are still the

formal IR programs because they don’t best road to validation and awareness.

publicly trade equity or debt and don’t Helps define and distinguish offering

have to report to anyone outside of the to advance agendas, such as

company. distribution, promotion, or financing,

to gain competitive edge.

TRANSFORMING IR

IR cannot be only an administrative function. It needs to work strategically,

report directly to the CEO and CFO, and insiuate itself into the practices

and strategies of the company. IR in many cases should be equally, if not

more, savvy with regard to the capital markets than the CEO or CFO, and

should constantly be on the lookout for anything that could damage or enhance

valuation. IR worries about the stock; the CEO should worry about

the business.

IR offers more than a plan, comments, or insights, it offers a tactical description

of how to get things done, how to achieve the desired result. IR

works through each quarter to support the decisions of senior management

and to qualitatively and quantitatively convey the story of these decisions to

all stakeholders.

IR should be management’s confidant, value detective, ear to the street,

bridge to the industry, strategic advisor, and insurance policy, much like out-

Finding the Company Story

Dress Best Shops is a retailer that experienced four quarters of terrible

same store sales results. The stock had gone from $20 a share to $13

and was on course to earn $1 per share in 2004. Management pulled

inward, refusing to talk to The Street, because it felt that it had no story

to tell. Over time the company had done well, but at this point, they

were opening stores at a slower pace and they weren’t quite sure why

their sales were poor.

It just so happens that the stock was trading at 13x the $1 earnings

estimate for 2004. This was in-line with other retailers, but they had

$11 per share in cash on their balance sheet. Wall Street was thus valuing

the operating company at $2 per share or 2x forward earnings, literally

a risk-free situation on par with a Treasury Bond. Plus, the company

had a great dividend and the opportunity existed for significant

equity appreciation over the next two to three years.

Contrary to management’s belief, Dress Best Shops was a very exciting

investment opportunity. The lack of risk made it a perfect situation

to get analyst coverage, as well as buy-side interest. And that’s exactly

what happened, in that order, because good IR is always

economic to the sell-side first. After they publish, and get the credit, the

buy-side gets involved.

sourced legal and accounting. Capital markets and public relations professionals

with experience on the other side of the table are a good start to executing

the new IR.

To paraphrase a line from Sean Connery’s character in the movie The

Untouchables, implementing and executing a strategic IR strategy without a

capital markets background is like “bringing a knife to a gunfight.” In order

to maximize equity value, companies must have intelligence and understanding

of the market, transparency, a comprehensive long-term plan, and

the management credibility and financial performance to bring in results.

Strategic IR is a critical cog in this process and if done correctly can add

another trusted and valuable management leg to the stool. The management

team and the public company are the product, and IR packages that product

for Wall Street consumption.

The difference between traditional IR and this book’s view of IR is the difference

between hope and control. Both approaches incorporate basic IR

functions, but traditional IR more than the present approach hangs its hat

on chance. In other words, the approach advocated here gives the dice to the

high rollers and bets with the house. Part IV shares several specific strategies

that IR should employ to mitigate risk and position the company to maximize

valuation.

Any company that does not approach the IR function as critical and

strategic is not acting in the best interest of its shareholders. Now, of course,

some smaller companies are so focused on their bottom lines that they refuse

to believe they can afford a sophisticated IR effort. Yet these same companies

have armies of lawyers, consultants, and accountants. IR is right up

there with those professional service providers and equally, if not more, important

as it relates to valuation issues.

Accordingly, the cost of any IR effort, no matter how sophisticated, is

nominal relative to the prospect of damaging the company’s valuation by

even one multiple point—a penalty that would, for example, translate to

$50 million of value for a company with 50 million shares outstanding.

OUT WITH THE OLD

The stakes are extremely high in corporate America today, and the payoff

can be equally great. That’s why every company, big and small, public and

private, needs to infuse a more sophisticated approach to their IR programs.

The new IR is a voice to and from the stock market, interpreting

the signposts, negotiating the hazards, and picking the best routes (see

Table 12.1).

TABLE 12.1 The New IR

Traditional IR New Approach

Strategy Supports strategy and makes sure it’s Helps create strategy, with the benefit

communicated to the key players. of understanding its impact on the

markets.

Story Crafts and communicates an investment Crafts, communicates and helps create

thesis based in operations and marketing a complete investment thesis that

strategies. Built from the executives’ hinges on valuation. Shuns promotion.

perspectives, sales-oriented. (See box on Dress Best Shops.)

Stock market reconnaissance Maintains a dutiful eye on the stock Understands valuation and daily market

market. volatility. Can discern if fluctuations are

are due to buy-sell imbalances, or

correlated to the underlying

fundamentals of a logical peer group.

Shareholder analysis Tracks stock ownership, names, and Tracks investors. Also creates investors

amounts, through any number of by looking at multiple comp groups

available databases and resources. based on size, business model

characteristics, balance-sheet strength

and valuation.

Approaching analysts Knows the value of analysts, but often Makes sure that guidance is set

approaches them qualitatively. conservatively and the story is

“packaged” properly before

approaching anyone. Mitigates risk.

Grasping the IR Revolution 81

TABLE 12.1 (continued)

Traditional IR New Approach

Feedback Considers feedback an important part of Has peer reltaionships with bankers,

the job. Success is based on peer analysts, and portfolio managers. Those

relationships in the capital markets relationships are driven off the ability

which may or may not exist. to talk valuation.

The CEO Supports the CEO, helps senior Provides senior, strategic, peer counsel

management sell the company strategy, to the CEO. Both cheerleader and

and provides information from The devil’s advocate. Coaches the ego out of

Street and the market as they know it. management. Comes in at strategy

creation to advise on best possible

choice for shareholders, and helps the

board quantify decisions and educate

The Street.

Managing the event Reactive, at least from an analyst’s Creates the company story and defines

perspective. Lacks experience or it with analysts before anyone has a

information to be proactive. chance to write it. Specific, conservative

guidance to control, in as much as

possible, the variables. Sophisticated

targeting to attract new buy-side and

sell-side blood.

TABLE 12.1 (continued)

Traditional IR New Approach

Smaller caps N/A Knows no public company can ignore

Some micro caps, small caps, and mid- IR. Uses conference calls and other

caps conduct IR as an afterthought. cost-effective strategies to enhance a

When regulations were more lax, did company’s multiple, which can mean

little more than bare necessities, such as millions of dollars for company value

SEC disclosures and annual meetings. as well as other benefits that far

outweigh the cost.

Private companies N/A Knows that a voice in the industry is

Most private companies do not have invaluable and that analysts are still the

formal IR programs because they don’t best road to validation and awareness.

publicly trade equity or debt and don’t Helps define and distinguish offering

have to report to anyone outside of the to advance agendas, such as

company. distribution, promotion, or financing,

to gain competitive edge.

TRANSFORMING IR

IR cannot be only an administrative function. It needs to work strategically,

report directly to the CEO and CFO, and insiuate itself into the practices

and strategies of the company. IR in many cases should be equally, if not

more, savvy with regard to the capital markets than the CEO or CFO, and

should constantly be on the lookout for anything that could damage or enhance

valuation. IR worries about the stock; the CEO should worry about

the business.

IR offers more than a plan, comments, or insights, it offers a tactical description

of how to get things done, how to achieve the desired result. IR

works through each quarter to support the decisions of senior management

and to qualitatively and quantitatively convey the story of these decisions to

all stakeholders.

IR should be management’s confidant, value detective, ear to the street,

bridge to the industry, strategic advisor, and insurance policy, much like out-

Finding the Company Story

Dress Best Shops is a retailer that experienced four quarters of terrible

same store sales results. The stock had gone from $20 a share to $13

and was on course to earn $1 per share in 2004. Management pulled

inward, refusing to talk to The Street, because it felt that it had no story

to tell. Over time the company had done well, but at this point, they

were opening stores at a slower pace and they weren’t quite sure why

their sales were poor.

It just so happens that the stock was trading at 13x the $1 earnings

estimate for 2004. This was in-line with other retailers, but they had

$11 per share in cash on their balance sheet. Wall Street was thus valuing

the operating company at $2 per share or 2x forward earnings, literally

a risk-free situation on par with a Treasury Bond. Plus, the company

had a great dividend and the opportunity existed for significant

equity appreciation over the next two to three years.

Contrary to management’s belief, Dress Best Shops was a very exciting

investment opportunity. The lack of risk made it a perfect situation

to get analyst coverage, as well as buy-side interest. And that’s exactly

what happened, in that order, because good IR is always

economic to the sell-side first. After they publish, and get the credit, the

buy-side gets involved.

sourced legal and accounting. Capital markets and public relations professionals

with experience on the other side of the table are a good start to executing

the new IR.

To paraphrase a line from Sean Connery’s character in the movie The

Untouchables, implementing and executing a strategic IR strategy without a

capital markets background is like “bringing a knife to a gunfight.” In order

to maximize equity value, companies must have intelligence and understanding

of the market, transparency, a comprehensive long-term plan, and

the management credibility and financial performance to bring in results.

Strategic IR is a critical cog in this process and if done correctly can add

another trusted and valuable management leg to the stool. The management

team and the public company are the product, and IR packages that product

for Wall Street consumption.