Introduction

A New Approach and Why

It’s Important

Earnings are coming in low, the CEO’s about to resign, inventory is up, and

the cost of new equipment just doubled. It’s a sure thing where the stock

price is headed, right?

Not necessarily. When it comes to the stock market, Adam Smith’s invisible

hand has been known to get a gentle tug from a variety of constituencies.

There’s the company itself and the information it provides.

There’s the equity research analysts who offer their intelligence and opinions

on the company and the industry. There’s the media and the stories they

present. Rounding out the mix are all of the stakeholders, such as employees

and strategic partners, and the long arms of their actions and opinions.

All of these constituencies influence those most affected by the tug, the

investors. From sophisticated institutions to ordinary individuals, investors

depend on reasonable information upon which they can make sound decisions.

The company’s responsibility is to seed the substance and direct the

form of this information, and IR is at the core of this responsibility.

Though the long-term value of a company’s stock correlates reliably to

a company’s long-term financial performance, the short-term price is vital to

keeping cost of capital low and maintaining a competitive advantage. We believe

stock price or equity value, is the tangible consequence of an obvious,

but often mismanaged, equation:

Equity value = Financial performance + How that performance is

interpreted by a variety of constituents

A company’s underlying fundamentals and industry outlook are important.

The company must understand its strengths and weaknesses in the context

of its competitive environment to attract the investors and investment

banks that present the best fit to come along for the long-term journey. How that story is told is critical. Packaging the information for each audience

must be done in the same way that gifted executives package and sell their

products. The bottom line is that public companies are in a sense products

to Wall Street, and Wall Street is the market for public companies. Let the

commerce begin.

Information alone does not determine stock price; it’s also the interpretation

and perception of that information. Recent stories from The Wall

Street Journal’s What’s News, Business and Finance column read something

like this:

An apparel company said its net income was overstated and that its

third quarter results were lower than reported. Stock slips in a sell-off.

A technology company’s shares fell 10 percent on worries about more

disclosures of accounting irregularities. Finance chief quits.

An entertainment company’s distribution deals are the subject of a

grand jury probe into potential conflicts of interest. Stock price slightly

up on low volume.

An Internet company’s earnings jumped 69 percent and sales surged 84

percent, beating forecasts. But its shares fell in after-hours trading on

high volume.

These examples are certainly a mixed bag with some counterintuitive

market reactions. The most likely reason that the entertainment company’s

stock didn’t move on bad news is the result of a consistent and clear IR strategy

and how that strategy managed expectations leading up to the event.

Chances are that the entertainment company’s stock was already down and

that new management dealt with the problem transparently and quickly. Although

there may be no catalyst for the stock (as evidenced by the low volume),

the worst is likely over. The news was likely compatible with shareholder

understanding of management’s assumptions regarding future

performance, and that’s exactly the situation that company wanted to be in

given the circumstances.

How about the Internet company? In all likelihood, the company had

been growing quickly and ignored IR while earnings were accelerating, a

common mistake. Without the proper strategy to control the sell-side, estimates

and expectations increased, leaving 69 percent earnings growth as a

disappointment. Too bad for the tech company’s management team that was

on the verge of an all-stock takeover of a rival company. Their stock just

plunged, and that acquisition just became materially more expensive or out

of the question altogether.

The thrust of traditional investor relations has included necessary disclosures,

such as annual reports and 10-Qs, as well as communications, such

as press releases and conference calls. As most IR professionals and Wall

Street experts know, this approach is not enough. Companies that are increasingly

aware of this fact look at IR more strategically than administratively.

This strategy shift must include proactive counsel that understands

the capital markets, positions the company properly, and cultivates interest

and investor confidence. The goal is to heighten management credibility,

generate third-party validation, and improve the company’s exposure to potential

investors, all to maximize equity value.

IR helps a company devise a strategy and present its story based on

quantitative and qualitative attributes, competitive issues, the industry situation,

and most importantly, the current valuation. In order to do this well,

IR must have the capacity to act as a peer or confidant to the CEO, CFO,

and the board of directors. Additionally, IR must advise on a variety of issues

from union relations to project development to dividend yields to crisis

management. IR must be able to solve problems and communicate issues in

the context of shareholder value, and do it quickly. This is the language of

the CEO, and it’s the basis on which he or she is compensated and judged.

And IR can’t talk the CEO’s language unless IR understands valuation and

capital markets. Period.

Part One of this book provides a quick overview of the capital markets,

the arena, its players, and how IR works with all of these areas.

Part Two covers the current environment, including what happened

during the boom and bust, the rules that surfaced, and the regulatory

environment.

Part Three looks at the basics of IR, including administrative and strategic

tasks, internal and external communications, and the changes we see

coming.

Part Four presents IR with dimension and reveals the practices that

marry IR, corporate communications, corporate strategy, and ultimately equity

value. In this section we answer:

What goes on in the day of an analyst?

What are the portfolio managers looking for?

How can a company uncover value?

Why is guidance so important?

When is the best time to release earnings announcements?

Why and when should a company ever pre-announce?

How can a teach-in boost a company’s visibility?

Why are Wall Street’s morning meetings key to IR strategy?

What are the landmines that CEOs can set off with just one wrong

word?

What is the most effective time for insiders to buy or sell stock?

How can a company best deal with short sellers?

What is plan B if a company can’t get coverage?

How do mid, small, and micro-caps stand out in a crowded field?

When are private companies missing out if they don’t have IR?

How can a company prevent the whisper number?

When is bad news better than no news?

Who’s not being honest, and how can a CEO get real feedback?

IR should be the tip of the spear of any financial communications strategy

and help management define the tangible and intangibles of valuation,

deliver a company story, and navigate the nuances of the capital markets dialogue

to maximize equity value.

In addition, the caliber of a company’s IR and the ability to untangle

complex communications problems must be upgraded and handled by people

with applicable experience. To us, it seems like common sense. A company

that is going to hire a third party to navigate its course on Wall Street

should retain someone with senior-level Wall Street experience. But then

again, common sense isn’t always so common.

Capital Markets and

Their Players

A Brief Primer

This portion of the book provides a very basic overview of the capital

markets: the arena, its players, and how IR works with all of

these areas. The IR skills and tools necessary to manage this arena

are only briefly presented here, and then discussed in-depth in Part

IV.

A New Approach and Why

It’s Important

Earnings are coming in low, the CEO’s about to resign, inventory is up, and

the cost of new equipment just doubled. It’s a sure thing where the stock

price is headed, right?

Not necessarily. When it comes to the stock market, Adam Smith’s invisible

hand has been known to get a gentle tug from a variety of constituencies.

There’s the company itself and the information it provides.

There’s the equity research analysts who offer their intelligence and opinions

on the company and the industry. There’s the media and the stories they

present. Rounding out the mix are all of the stakeholders, such as employees

and strategic partners, and the long arms of their actions and opinions.

All of these constituencies influence those most affected by the tug, the

investors. From sophisticated institutions to ordinary individuals, investors

depend on reasonable information upon which they can make sound decisions.

The company’s responsibility is to seed the substance and direct the

form of this information, and IR is at the core of this responsibility.

Though the long-term value of a company’s stock correlates reliably to

a company’s long-term financial performance, the short-term price is vital to

keeping cost of capital low and maintaining a competitive advantage. We believe

stock price or equity value, is the tangible consequence of an obvious,

but often mismanaged, equation:

Equity value = Financial performance + How that performance is

interpreted by a variety of constituents

A company’s underlying fundamentals and industry outlook are important.

The company must understand its strengths and weaknesses in the context

of its competitive environment to attract the investors and investment

banks that present the best fit to come along for the long-term journey. How that story is told is critical. Packaging the information for each audience

must be done in the same way that gifted executives package and sell their

products. The bottom line is that public companies are in a sense products

to Wall Street, and Wall Street is the market for public companies. Let the

commerce begin.

Information alone does not determine stock price; it’s also the interpretation

and perception of that information. Recent stories from The Wall

Street Journal’s What’s News, Business and Finance column read something

like this:

An apparel company said its net income was overstated and that its

third quarter results were lower than reported. Stock slips in a sell-off.

A technology company’s shares fell 10 percent on worries about more

disclosures of accounting irregularities. Finance chief quits.

An entertainment company’s distribution deals are the subject of a

grand jury probe into potential conflicts of interest. Stock price slightly

up on low volume.

An Internet company’s earnings jumped 69 percent and sales surged 84

percent, beating forecasts. But its shares fell in after-hours trading on

high volume.

These examples are certainly a mixed bag with some counterintuitive

market reactions. The most likely reason that the entertainment company’s

stock didn’t move on bad news is the result of a consistent and clear IR strategy

and how that strategy managed expectations leading up to the event.

Chances are that the entertainment company’s stock was already down and

that new management dealt with the problem transparently and quickly. Although

there may be no catalyst for the stock (as evidenced by the low volume),

the worst is likely over. The news was likely compatible with shareholder

understanding of management’s assumptions regarding future

performance, and that’s exactly the situation that company wanted to be in

given the circumstances.

How about the Internet company? In all likelihood, the company had

been growing quickly and ignored IR while earnings were accelerating, a

common mistake. Without the proper strategy to control the sell-side, estimates

and expectations increased, leaving 69 percent earnings growth as a

disappointment. Too bad for the tech company’s management team that was

on the verge of an all-stock takeover of a rival company. Their stock just

plunged, and that acquisition just became materially more expensive or out

of the question altogether.

The thrust of traditional investor relations has included necessary disclosures,

such as annual reports and 10-Qs, as well as communications, such

as press releases and conference calls. As most IR professionals and Wall

Street experts know, this approach is not enough. Companies that are increasingly

aware of this fact look at IR more strategically than administratively.

This strategy shift must include proactive counsel that understands

the capital markets, positions the company properly, and cultivates interest

and investor confidence. The goal is to heighten management credibility,

generate third-party validation, and improve the company’s exposure to potential

investors, all to maximize equity value.

IR helps a company devise a strategy and present its story based on

quantitative and qualitative attributes, competitive issues, the industry situation,

and most importantly, the current valuation. In order to do this well,

IR must have the capacity to act as a peer or confidant to the CEO, CFO,

and the board of directors. Additionally, IR must advise on a variety of issues

from union relations to project development to dividend yields to crisis

management. IR must be able to solve problems and communicate issues in

the context of shareholder value, and do it quickly. This is the language of

the CEO, and it’s the basis on which he or she is compensated and judged.

And IR can’t talk the CEO’s language unless IR understands valuation and

capital markets. Period.

Part One of this book provides a quick overview of the capital markets,

the arena, its players, and how IR works with all of these areas.

Part Two covers the current environment, including what happened

during the boom and bust, the rules that surfaced, and the regulatory

environment.

Part Three looks at the basics of IR, including administrative and strategic

tasks, internal and external communications, and the changes we see

coming.

Part Four presents IR with dimension and reveals the practices that

marry IR, corporate communications, corporate strategy, and ultimately equity

value. In this section we answer:

What goes on in the day of an analyst?

What are the portfolio managers looking for?

How can a company uncover value?

Why is guidance so important?

When is the best time to release earnings announcements?

Why and when should a company ever pre-announce?

How can a teach-in boost a company’s visibility?

Why are Wall Street’s morning meetings key to IR strategy?

What are the landmines that CEOs can set off with just one wrong

word?

What is the most effective time for insiders to buy or sell stock?

How can a company best deal with short sellers?

What is plan B if a company can’t get coverage?

How do mid, small, and micro-caps stand out in a crowded field?

When are private companies missing out if they don’t have IR?

How can a company prevent the whisper number?

When is bad news better than no news?

Who’s not being honest, and how can a CEO get real feedback?

IR should be the tip of the spear of any financial communications strategy

and help management define the tangible and intangibles of valuation,

deliver a company story, and navigate the nuances of the capital markets dialogue

to maximize equity value.

In addition, the caliber of a company’s IR and the ability to untangle

complex communications problems must be upgraded and handled by people

with applicable experience. To us, it seems like common sense. A company

that is going to hire a third party to navigate its course on Wall Street

should retain someone with senior-level Wall Street experience. But then

again, common sense isn’t always so common.

Capital Markets and

Their Players

A Brief Primer

This portion of the book provides a very basic overview of the capital

markets: the arena, its players, and how IR works with all of

these areas. The IR skills and tools necessary to manage this arena

are only briefly presented here, and then discussed in-depth in Part

IV.