CHAPTER 22 Maintaining and Building Relationships

The capital markets, like any business, are driven by relationships, and

there is no better way to maximize the process for everyone involved than

a long-term commitment to transparency and consistency. Investors depend

on analysts, analysts rely on management, and management teams rely on

investors.

Successful long-term interactions between companies and the capital

markets are not one-sided and depend greatly on building mutual trust. This

mating dance between company and analyst or company and portfolio

manager is at the core of building that trust. Over time, if each party understands

and respects one another’s job, shareholders are positioned to come

out on top.

MUTUAL RESPECT AND TRUST

To build long-term relationships, strategic IR must respect the interaction

and trust that the analyst maintains with both investors and management

teams. If senior management is unaware of the importance of this relationship,

IR should lay out concrete examples of how a lack of understanding in

this area can cost the CEO and shareholders millions.

One way IR can protect the relationship is to continually educate analysts,

through honest and frequent communication. In that spirit, IR might

suggest to senior management that a schedule of earnings pre-announcements

would heighten and improve the ongoing dialogue. It would ensure

that the market is updated eight rather than four times per year, and more

frequent information means less risk for an analyst. That’s protection

brought on by IR policy.

Management may find that the analyst is equally motivated to return

that protection. This subtle protection can be as basic as the analyst being

upfront with management about her rating system and how it works, price

targets, estimate changes, and under what circumstances she might downgrade

the stock. This in turn helps the CEO and CFO to better understand

the analyst and her job and makes it less likely that management will take

the analyst’s action personally, which always plays poorly in public forums.

To that point, IR professionals see many management teams that are

overly focused on their day-to-day stock prices when they should actually

be focused on their businesses. What these management teams need to realize

is that stocks go up and down based on many factors, from a shift in

an investor’s position to a strategist’s call on the economy. But because analysts

hold such sway with the investment community, their negative opinions

can grate loudest on a CEO’s nerves. In our experience, management

teams that take analyst downgrades personally are only setting themselves

up to look bad.

Ultimately, analysts have a job to do, to give unbiased opinions, right or

wrong. A CEO who doesn’t understand that fact, or understand that analysts’

opinions are part of the double-edged sword of being public, should

probably be working for a private company. IR must educate management

personnel to check their emotions and make them understand that the only

way to counter analyst’s negative opinions is to consistently produce solid

earnings relative to expectations.

Below is an example where the CEO’s lack of understanding positioned

the company in a very negative light.

Building bridges from IR and management to Wall Street can prevent

this type of unnecessary and unproductive antagonism. It’s harmful to

everyone, hurts shareholders, and would have been a non-event had the

CEO been better educated when it came to the analyst’s job and the way perceptions

are created on Wall Street. Management should have ignored the

downgrade and focused on running the business. If management was right,

the analyst would have been proven wrong eventually anyway.

MAINTAINING AND BUILDING RELATIONSHIPS—

THE SELL-SIDE

IR should have a plan to improve its relationships with key sell-side analysts

while cultivating relationships with new ones. The first step in this process is

to establish policies that position the company as more forthcoming and

transparent, which in turn reduces risk for analysts. The key to actually implementing these policies, however, is management’s understanding of why

they are so important. In other words, if analysts understand that they will

get honest information on a systematic basis, their career risk and their

firm’s risk is materially reduced.

Policies that help maintain a solid relationship include conducting conference

calls after the market closes when material positive or negative

events occur. This allows the analyst to understand the events and ask questions

while the market is closed and formulate an educated opinion. The

policies can also include regularly scheduled pre-announcements, which ensure

timely information at the end of each quarter but before the earnings release.

Finally, extra tables in a company’s press release that describe historical

drivers of the business would be helpful.

Ultimately, IR and management must work together to understand analyst

concerns—what information they need and when they need it—and out

of that process better communication will likely result. Better communica-

Maintaining and Building Relationships 199

A June 19, 2003, article in The Wall Street Journal portrayed the consequences

of not establishing a trusting relationship between management

and The Street and shows a lack of understanding when it comes

to the IR Dialogue stage. It cited the case of Fresh Del Monte Produce

Inc. when an analyst at BB&T downgraded the company’s stock, citing

risks from litigation and her perception of threats to the core business.

On the day of her downgrade, the stock fell more than 10 percent.

As the Journal tells it: “In a February 2003 conference call with the

company, the analyst asked a question about pricing and the company’s

chief executive said: ‘Let me tell you one thing, please. You are covering

us without our will and we would not like you to ask questions on this

conference call.’ When the analyst asked why, the CEO said: ‘We don’t

want you to ask questions. You can make your own conclusion. You

can cover us the way you want, but you have not been covering us in

any objective way and we thank you for being on this call, but we don’t

like to answer your question.’”

The article stated that the analyst was surprised by this and even

more surprised when “Fresh Del Monte named her in a lawsuit a

month later. A part of a complicated dispute with the company’s former

owners, Del Monte Fresh filed a suit in State Supreme Court in New

York in March, charging that certain business people were part of a

‘conspiracy’ that caused the company’s stock to drop precipitously.”

tion can often buy management an edge in getting its point of view across to

Wall Street.

IR should seek out new analysts as well, and the timeliness of this outreach

may depend on the company’s relative valuation. For example, if the

price of a company’s stock has been forced down because of a temporary

setback, each multiple compression and each dollar drop may represent an

opportunity for analysts looking for ideas. For that reason, IR must make it

a point to constantly educate all the analysts in advance rather than wait for

a problem to reach out. If that course is taken, the likelihood increases that

an analyst will move quickly with a recommendation. Without that groundwork,

the analyst would likely take many weeks, if not more, to learn about

the company, visit management, and talk to vendors and consumers before

gaining the comfort level to publish. Therefore, as part of the relationship

process, IR must be aware of analyst movement around The Street, investment

banks that are starting an industry practice, or analysts who are free to

publish on multiple groups of stocks.

Additionally, an investment bank occasionally drops research coverage

altogether. This move can be the result of many factors, including a company

that doesn’t seem to fit into a particular coverage universe or a company that

doesn’t fit with the philosophy of the investment bank’s organization (another

company might be a better fit with research/trading/and investment banking).

Finally, stocks that languish are also candidates for the revolving door.

IR must be aware of why analysts drop stocks and attempt to prevent it.

Because most analysts are looking for something that will lead them to believe

the stock will move either up or down, it’s simply a matter of engaging

the analyst and conservatively communicating the story. But if there’s no

news to tell, IR has to be clever. By feeding analysts industry information

like new products or promising consumer trends, IR gives the analyst incremental

intelligence, which can be a huge help. Why would an analyst want

to stop that flow of information by dropping coverage, even if the company

isn’t the most exciting?

The next chapter covers in-person meetings, but just in terms of information

sharing, analyst tracking, and policies, IR has many ways in which it

can add value to the process.

MAINTAINING AND BUILDING RELATIONSHIPS—

BUY-SIDE

The buy-side approach to relationships is essentially the same as the sell-side

approach, but involves a bit more guesswork and a dramatically longer list.

IR can never know on a daily basis who actually owns stock in his or her

company. That exact information is only issued four times per year, about

six weeks after the close of each quarter.

IR should take this information, identify the contact information for the

appropriate portfolio manager, and create a master distribution list that will

be adjusted and updated each quarter. Regardless of what accounts on the

buy-side own the company’s stock at any given time, however, they should

all be on the distribution in an effort to educate them on an ongoing basis.

IR’s job is to fight for shelf space with the buy-side, and regardless of ownership,

portfolio managers should always have a flow of information.

Unlike the sell-side list, which may only involve 10 to 20 names at any

given time, institutional buyers can be segmented into multiple categories.

They can be growth or value buyers or some variation on those themes. In

addition, they can be mutual funds or hedge funds with long- or short-term

orientation. IR’s job is to constantly create relationships with these buyers

and make sure that they receive a steady stream of company information.

Again, as stocks move up and down, any one of these groups can gain in

importance. In other words, while the stock is increasing, IR shouldn’t overlook

educating value investors whom the company may need if unforeseen

events sharply decrease valuation. Such knowledge comes too late if IR waits

for the negative event to happen before understanding who the value players

are and educating them on the company story.

HANDLING AND PRIORITIZING NEW INQUIRIES

Although not highly strategic, handling and processing inquiries is extremely

important. First, this activity brings structure to the process so management

isn’t just reacting to requests. Second, dealing with new inquiries efficiently

saves money and time. For example, having the tools to identify callers prevents

management teams from spending time with the wrong investors or

with potential investors who misrepresent themselves. Bob James might call

one afternoon and request an hour with management. Mr. James seems to

have all the right credentials as he manages over $1 billion for a reputable

mutual fund. The only problem, as it turns out, is that Mr. James is the

largest shareholder of the company’s competitor. Not that the meeting is a

waste, because Bob James could be converted into a shareholder. Our point

is that it’s important to know who management is talking to and prioritizing

those conversations because Bob James might be meeting only to protect his

investment in the competitor. It comes down to access to software that can

quickly and easily identify the financial caller, his fund, the amount of money he manages, and his recent behavior in the sector. Before any calls are

returned or any meetings are taken, the company should know the answers

to those questions.

SHORT SELLERS

Unfortunately, IR relationships should extend to those groups that don’t

necessarily have the company’s best interests at heart. At the top of that list

are short sellers, who bet against the company’s outlook and hope that the

share price will go down. Although normally short-term in nature, these bets

are nonetheless infuriating to most management teams as emotions get the

best of senior executives. Therefore, it’s important to identify short sellers

whenever possible and counsel management on the best course of action for

dealing with them.

An SEC rule is that short sellers must report their holdings and through

various databases. The Short Interest Ratio (SIR) records the short interest

outstanding over the average daily volume of shares traded. If that number

is 2, for example, that means it would take two full days of average trading

for short sellers to cover—that is, buy back the shares they borrowed and

sold. If this number goes up, a company can look at it as a group betting

against them, although many look at a high SIR as bullish because of the

built-in buying if fundamentals take a turn for the positive.

If short sellers are active in a company’s stock, IR first and foremost

should counsel management as to what the approach should be. A cool and

detached mind-set is preferable. Waging a public battle trying to prove them

wrong is almost always a losing game.

In fact, according to a January 26, 2003, article in The New York

Times, Professor Owen A. Lamont, associate professor of finance at the University

of Chicago’s graduate school of business, analyzed the returns of 270

companies that waged public battles with short sellers. He found that their

stocks lagged the market by 2.34 percent in each of the 12 months after the

battles began. The study, which covers 25 years, not only found that the

companies involved were generally overpriced, but also found that the short

sellers were consistently right. Professor Lamont went on to divide the tactics

used against short sellers into three types:

1. Belligerent statements which include claims of a conspiracy

2. Taking legal action against the short sellers

3. Undertaking technical maneuvers to prevent short selling (like urging

shareholders to register shares in their own name to prevent borrowing)

The study included companies like Conseco, Samsonite, and Micro-

Strategy, and more recently Allied Capital, MBIA, Farmer Mac, and Pre-

Paid Legal Services. What seems to be the common thread is that when

stocks begin to fall, “companies, investors, and even regulators often attack

short sellers.”

“But short sellers are not the enemy of investors. The fact is, short sellers

actually reduce volatility in the market. Their selling helps keep stocks

from flying too high, and when they close out their trades, the buying often

gives beleaguered stocks support.”

Therefore, with historical proof that companies locking horns with

short sellers is the wrong move, IR might question pursuing the relationship

at all.

Staying close to shorts and finding out their arguments allows management

to confront issues head-on in conference calls and earnings releases.

Short interest can be bullish and useful, because short sellers invariably

cover (buy the stock back), and when they do, the stock will likely be

“squeezed” upward.

Shorts can often force irrational management teams to be realistic about

guidance. However, some management teams have actually promised a

higher earnings growth rate in an attempt to scare the shorts away. This

tactic only adds risk to the stock and is totally the wrong way to go.

Maintaining and Building Relationships 203

Big Muscles, a company in the fitness sector, had a significant short interest

position. Through some reconnaissance IR was able to discover

that the shorts were betting against Big Muscle for four specific reasons:

the core product was 95 percent of revenues, the market was approaching

full penetration, their financing of customers was a perceived

risk, and the cost of their primary source of promotion—TV advertising—

was rising.

The shorts’ presence also signaled a lack of faith in management

and fueled the CEO, along with IR, to discern what might have been

broken in the business and fix it. Big Muscles ultimately lowered its financial

guidance to The Street, admitted some mistakes, and articulated

the plan to get back on track. Over time the shorts covered, and

the company’s valuation improved.

IR is the ideal group to craft a short seller strategy. As a third party outside

of the executive suite, IR will likely be less emotional about hearing the

short story and know best how to use those points. Though bringing down

overly optimistic guidance can often solve the short seller problem, IR’s job

is to dig deeper, discover the underlying short argument, and make sure each

point has a counterpoint in every communication to The Street.

Ultimately, maintaining relationships with the capital markets is about

sharing information and laying the groundwork for introductions when

out-of-the-ordinary events occur. That might include meeting growth versus

value investors once operations pick up. Similarly, it could mean targeting

value investors as the stock decreases and short positions grow. These

value investors will be looking for a turn in the business, knowing that

when it does, built-in buying pressure will exist as short sellers cover their

open positions.

The capital markets, like any business, are driven by relationships, and

there is no better way to maximize the process for everyone involved than

a long-term commitment to transparency and consistency. Investors depend

on analysts, analysts rely on management, and management teams rely on

investors.

Successful long-term interactions between companies and the capital

markets are not one-sided and depend greatly on building mutual trust. This

mating dance between company and analyst or company and portfolio

manager is at the core of building that trust. Over time, if each party understands

and respects one another’s job, shareholders are positioned to come

out on top.

MUTUAL RESPECT AND TRUST

To build long-term relationships, strategic IR must respect the interaction

and trust that the analyst maintains with both investors and management

teams. If senior management is unaware of the importance of this relationship,

IR should lay out concrete examples of how a lack of understanding in

this area can cost the CEO and shareholders millions.

One way IR can protect the relationship is to continually educate analysts,

through honest and frequent communication. In that spirit, IR might

suggest to senior management that a schedule of earnings pre-announcements

would heighten and improve the ongoing dialogue. It would ensure

that the market is updated eight rather than four times per year, and more

frequent information means less risk for an analyst. That’s protection

brought on by IR policy.

Management may find that the analyst is equally motivated to return

that protection. This subtle protection can be as basic as the analyst being

upfront with management about her rating system and how it works, price

targets, estimate changes, and under what circumstances she might downgrade

the stock. This in turn helps the CEO and CFO to better understand

the analyst and her job and makes it less likely that management will take

the analyst’s action personally, which always plays poorly in public forums.

To that point, IR professionals see many management teams that are

overly focused on their day-to-day stock prices when they should actually

be focused on their businesses. What these management teams need to realize

is that stocks go up and down based on many factors, from a shift in

an investor’s position to a strategist’s call on the economy. But because analysts

hold such sway with the investment community, their negative opinions

can grate loudest on a CEO’s nerves. In our experience, management

teams that take analyst downgrades personally are only setting themselves

up to look bad.

Ultimately, analysts have a job to do, to give unbiased opinions, right or

wrong. A CEO who doesn’t understand that fact, or understand that analysts’

opinions are part of the double-edged sword of being public, should

probably be working for a private company. IR must educate management

personnel to check their emotions and make them understand that the only

way to counter analyst’s negative opinions is to consistently produce solid

earnings relative to expectations.

Below is an example where the CEO’s lack of understanding positioned

the company in a very negative light.

Building bridges from IR and management to Wall Street can prevent

this type of unnecessary and unproductive antagonism. It’s harmful to

everyone, hurts shareholders, and would have been a non-event had the

CEO been better educated when it came to the analyst’s job and the way perceptions

are created on Wall Street. Management should have ignored the

downgrade and focused on running the business. If management was right,

the analyst would have been proven wrong eventually anyway.

MAINTAINING AND BUILDING RELATIONSHIPS—

THE SELL-SIDE

IR should have a plan to improve its relationships with key sell-side analysts

while cultivating relationships with new ones. The first step in this process is

to establish policies that position the company as more forthcoming and

transparent, which in turn reduces risk for analysts. The key to actually implementing these policies, however, is management’s understanding of why

they are so important. In other words, if analysts understand that they will

get honest information on a systematic basis, their career risk and their

firm’s risk is materially reduced.

Policies that help maintain a solid relationship include conducting conference

calls after the market closes when material positive or negative

events occur. This allows the analyst to understand the events and ask questions

while the market is closed and formulate an educated opinion. The

policies can also include regularly scheduled pre-announcements, which ensure

timely information at the end of each quarter but before the earnings release.

Finally, extra tables in a company’s press release that describe historical

drivers of the business would be helpful.

Ultimately, IR and management must work together to understand analyst

concerns—what information they need and when they need it—and out

of that process better communication will likely result. Better communica-

Maintaining and Building Relationships 199

A June 19, 2003, article in The Wall Street Journal portrayed the consequences

of not establishing a trusting relationship between management

and The Street and shows a lack of understanding when it comes

to the IR Dialogue stage. It cited the case of Fresh Del Monte Produce

Inc. when an analyst at BB&T downgraded the company’s stock, citing

risks from litigation and her perception of threats to the core business.

On the day of her downgrade, the stock fell more than 10 percent.

As the Journal tells it: “In a February 2003 conference call with the

company, the analyst asked a question about pricing and the company’s

chief executive said: ‘Let me tell you one thing, please. You are covering

us without our will and we would not like you to ask questions on this

conference call.’ When the analyst asked why, the CEO said: ‘We don’t

want you to ask questions. You can make your own conclusion. You

can cover us the way you want, but you have not been covering us in

any objective way and we thank you for being on this call, but we don’t

like to answer your question.’”

The article stated that the analyst was surprised by this and even

more surprised when “Fresh Del Monte named her in a lawsuit a

month later. A part of a complicated dispute with the company’s former

owners, Del Monte Fresh filed a suit in State Supreme Court in New

York in March, charging that certain business people were part of a

‘conspiracy’ that caused the company’s stock to drop precipitously.”

tion can often buy management an edge in getting its point of view across to

Wall Street.

IR should seek out new analysts as well, and the timeliness of this outreach

may depend on the company’s relative valuation. For example, if the

price of a company’s stock has been forced down because of a temporary

setback, each multiple compression and each dollar drop may represent an

opportunity for analysts looking for ideas. For that reason, IR must make it

a point to constantly educate all the analysts in advance rather than wait for

a problem to reach out. If that course is taken, the likelihood increases that

an analyst will move quickly with a recommendation. Without that groundwork,

the analyst would likely take many weeks, if not more, to learn about

the company, visit management, and talk to vendors and consumers before

gaining the comfort level to publish. Therefore, as part of the relationship

process, IR must be aware of analyst movement around The Street, investment

banks that are starting an industry practice, or analysts who are free to

publish on multiple groups of stocks.

Additionally, an investment bank occasionally drops research coverage

altogether. This move can be the result of many factors, including a company

that doesn’t seem to fit into a particular coverage universe or a company that

doesn’t fit with the philosophy of the investment bank’s organization (another

company might be a better fit with research/trading/and investment banking).

Finally, stocks that languish are also candidates for the revolving door.

IR must be aware of why analysts drop stocks and attempt to prevent it.

Because most analysts are looking for something that will lead them to believe

the stock will move either up or down, it’s simply a matter of engaging

the analyst and conservatively communicating the story. But if there’s no

news to tell, IR has to be clever. By feeding analysts industry information

like new products or promising consumer trends, IR gives the analyst incremental

intelligence, which can be a huge help. Why would an analyst want

to stop that flow of information by dropping coverage, even if the company

isn’t the most exciting?

The next chapter covers in-person meetings, but just in terms of information

sharing, analyst tracking, and policies, IR has many ways in which it

can add value to the process.

MAINTAINING AND BUILDING RELATIONSHIPS—

BUY-SIDE

The buy-side approach to relationships is essentially the same as the sell-side

approach, but involves a bit more guesswork and a dramatically longer list.

IR can never know on a daily basis who actually owns stock in his or her

company. That exact information is only issued four times per year, about

six weeks after the close of each quarter.

IR should take this information, identify the contact information for the

appropriate portfolio manager, and create a master distribution list that will

be adjusted and updated each quarter. Regardless of what accounts on the

buy-side own the company’s stock at any given time, however, they should

all be on the distribution in an effort to educate them on an ongoing basis.

IR’s job is to fight for shelf space with the buy-side, and regardless of ownership,

portfolio managers should always have a flow of information.

Unlike the sell-side list, which may only involve 10 to 20 names at any

given time, institutional buyers can be segmented into multiple categories.

They can be growth or value buyers or some variation on those themes. In

addition, they can be mutual funds or hedge funds with long- or short-term

orientation. IR’s job is to constantly create relationships with these buyers

and make sure that they receive a steady stream of company information.

Again, as stocks move up and down, any one of these groups can gain in

importance. In other words, while the stock is increasing, IR shouldn’t overlook

educating value investors whom the company may need if unforeseen

events sharply decrease valuation. Such knowledge comes too late if IR waits

for the negative event to happen before understanding who the value players

are and educating them on the company story.

HANDLING AND PRIORITIZING NEW INQUIRIES

Although not highly strategic, handling and processing inquiries is extremely

important. First, this activity brings structure to the process so management

isn’t just reacting to requests. Second, dealing with new inquiries efficiently

saves money and time. For example, having the tools to identify callers prevents

management teams from spending time with the wrong investors or

with potential investors who misrepresent themselves. Bob James might call

one afternoon and request an hour with management. Mr. James seems to

have all the right credentials as he manages over $1 billion for a reputable

mutual fund. The only problem, as it turns out, is that Mr. James is the

largest shareholder of the company’s competitor. Not that the meeting is a

waste, because Bob James could be converted into a shareholder. Our point

is that it’s important to know who management is talking to and prioritizing

those conversations because Bob James might be meeting only to protect his

investment in the competitor. It comes down to access to software that can

quickly and easily identify the financial caller, his fund, the amount of money he manages, and his recent behavior in the sector. Before any calls are

returned or any meetings are taken, the company should know the answers

to those questions.

SHORT SELLERS

Unfortunately, IR relationships should extend to those groups that don’t

necessarily have the company’s best interests at heart. At the top of that list

are short sellers, who bet against the company’s outlook and hope that the

share price will go down. Although normally short-term in nature, these bets

are nonetheless infuriating to most management teams as emotions get the

best of senior executives. Therefore, it’s important to identify short sellers

whenever possible and counsel management on the best course of action for

dealing with them.

An SEC rule is that short sellers must report their holdings and through

various databases. The Short Interest Ratio (SIR) records the short interest

outstanding over the average daily volume of shares traded. If that number

is 2, for example, that means it would take two full days of average trading

for short sellers to cover—that is, buy back the shares they borrowed and

sold. If this number goes up, a company can look at it as a group betting

against them, although many look at a high SIR as bullish because of the

built-in buying if fundamentals take a turn for the positive.

If short sellers are active in a company’s stock, IR first and foremost

should counsel management as to what the approach should be. A cool and

detached mind-set is preferable. Waging a public battle trying to prove them

wrong is almost always a losing game.

In fact, according to a January 26, 2003, article in The New York

Times, Professor Owen A. Lamont, associate professor of finance at the University

of Chicago’s graduate school of business, analyzed the returns of 270

companies that waged public battles with short sellers. He found that their

stocks lagged the market by 2.34 percent in each of the 12 months after the

battles began. The study, which covers 25 years, not only found that the

companies involved were generally overpriced, but also found that the short

sellers were consistently right. Professor Lamont went on to divide the tactics

used against short sellers into three types:

1. Belligerent statements which include claims of a conspiracy

2. Taking legal action against the short sellers

3. Undertaking technical maneuvers to prevent short selling (like urging

shareholders to register shares in their own name to prevent borrowing)

The study included companies like Conseco, Samsonite, and Micro-

Strategy, and more recently Allied Capital, MBIA, Farmer Mac, and Pre-

Paid Legal Services. What seems to be the common thread is that when

stocks begin to fall, “companies, investors, and even regulators often attack

short sellers.”

“But short sellers are not the enemy of investors. The fact is, short sellers

actually reduce volatility in the market. Their selling helps keep stocks

from flying too high, and when they close out their trades, the buying often

gives beleaguered stocks support.”

Therefore, with historical proof that companies locking horns with

short sellers is the wrong move, IR might question pursuing the relationship

at all.

Staying close to shorts and finding out their arguments allows management

to confront issues head-on in conference calls and earnings releases.

Short interest can be bullish and useful, because short sellers invariably

cover (buy the stock back), and when they do, the stock will likely be

“squeezed” upward.

Shorts can often force irrational management teams to be realistic about

guidance. However, some management teams have actually promised a

higher earnings growth rate in an attempt to scare the shorts away. This

tactic only adds risk to the stock and is totally the wrong way to go.

Maintaining and Building Relationships 203

Big Muscles, a company in the fitness sector, had a significant short interest

position. Through some reconnaissance IR was able to discover

that the shorts were betting against Big Muscle for four specific reasons:

the core product was 95 percent of revenues, the market was approaching

full penetration, their financing of customers was a perceived

risk, and the cost of their primary source of promotion—TV advertising—

was rising.

The shorts’ presence also signaled a lack of faith in management

and fueled the CEO, along with IR, to discern what might have been

broken in the business and fix it. Big Muscles ultimately lowered its financial

guidance to The Street, admitted some mistakes, and articulated

the plan to get back on track. Over time the shorts covered, and

the company’s valuation improved.

IR is the ideal group to craft a short seller strategy. As a third party outside

of the executive suite, IR will likely be less emotional about hearing the

short story and know best how to use those points. Though bringing down

overly optimistic guidance can often solve the short seller problem, IR’s job

is to dig deeper, discover the underlying short argument, and make sure each

point has a counterpoint in every communication to The Street.

Ultimately, maintaining relationships with the capital markets is about

sharing information and laying the groundwork for introductions when

out-of-the-ordinary events occur. That might include meeting growth versus

value investors once operations pick up. Similarly, it could mean targeting

value investors as the stock decreases and short positions grow. These

value investors will be looking for a turn in the business, knowing that

when it does, built-in buying pressure will exist as short sellers cover their

open positions.