CHAPTER 1 The Capital Markets and IR

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 made up 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 buyside

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 Though the SEC does not have a specific definition for material information,

the term is generally interpreted to mean anything that would

affect the understanding and decision making of an investor—i.e. anything

that would cause a rational investor to act.

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 PRICES

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 bil-

FIGURE 1.1 The Financial Communciations Filter

Buy-Side

Sell-Side

Customers/Suppliers

Government

Company Message Media

lion, 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.

“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.”

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

The Capital Markets and IR 7

The Weighted Average Cost of Capital

WACC= E/V * Re + D/V * Rd * (1-Tc)

Re = cost of equity

Rd = cost of debt

E = market value company’s equity

D = market value of company’s debt

V = E + D

E/V = equity percentage of capital

D/V = debt percentage of capital

Tc = the corporate tax rate

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

Increasing stock price

Lower cost of capital Better media coverage

Improved employee morale,

vendor relationships

Greater ability to finance growth

initiatives and/or acquisitions

Improved growth opportunities

and profitability

FIGURE 1.2 Maintaining a Premium Relative Multiple

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 some-

The Capital Markets and IR 9

Perception and

understanding of

performance

20%–40%

Financial

performance

60%–80%

FIGURE 1.3 The Valuation Pie

thing 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.

GLOBAL IR

Companies are expanding their communications to foreign sources of capital,

and investors are culling a global range of investment opportunities. In

Two companies of similar size in a similar industry are growing

earnings at 20 percent annually, yet one trades inexpensively at a 10x

P/E multiple while the other garners a 20x P/E multiple. The former, in

all likelihood, has credibility issues or problems understanding the investment

community. The latter most likely understands the nuances of

communication, how to be economic to investment banks, and how to

preserve credibility in tough times. That’s the art of the stock market

and that’s what affects equity value.

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.

Once a pool of potential investors is identified, IR must think through

the issues that an international portfolio manager or analyst will have to

address to complete adequate due diligence. Additionally, if the investment

idea comes from a voice they feel they can trust—someone with whom

they have a relationship or who has experience in the overseas markets—

international marketing can be efficient. Companies should consider marketing

with a brokerage firm that has institutional salespeople who cover

that region. Thankfully, the investment bank consolidation of the 1990s

created many such banks with strong overseas presence, including Credit Suisse

First Boston, Deutsche Bank (formerly BT Alex. Brown), and CIBC

Oppenheimer.

Experience has taught us that investment opportunities tend to travel

better when a product or service of the company is already international.

Companies listed on U.S. exchanges that do a substantial amount of business

overseas have a much easier task translating their business, and thus

their investment merits, to foreign investors.

Many large branded companies, like Starbucks and Wal-Mart, have

had significant international business success and have also captured the

attention of foreign investors. Some emerging companies have also done

the same.

One good example is Quiksilver, the world’s leading purveyor of surf

and boardsport-inspired apparel and accessories. In 2003 institutional investors

were reluctant to pay a higher multiple for the perceived growth of

the rapidly growing global brand, so management wanted to cast a wider

net. The investment merits of this smaller-capitalization growth company

traveled well and attracted foreign investor interest due to their international

brand-name recognition. Any portfolio manager with kids, whether living in

France, Australia, or the United States, was probably buying the company’s

products, which made it easier to explain the investment opportunities to

foreign investors.

The Tangled Web

No company operates in a vacuum. Every decision ripples through the capital

markets. The sell-side, the buy-side, strategic partners, the media, regulators,

and the global community are all important constituencies to be addressed

by investor relations. IR with capital markets know-how is

invaluable to companies addressing these constituencies and helps to maximize

equity value.

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 made up 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 buyside

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 Though the SEC does not have a specific definition for material information,

the term is generally interpreted to mean anything that would

affect the understanding and decision making of an investor—i.e. anything

that would cause a rational investor to act.

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 PRICES

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 bil-

FIGURE 1.1 The Financial Communciations Filter

Buy-Side

Sell-Side

Customers/Suppliers

Government

Company Message Media

lion, 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.

“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.”

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

The Capital Markets and IR 7

The Weighted Average Cost of Capital

WACC= E/V * Re + D/V * Rd * (1-Tc)

Re = cost of equity

Rd = cost of debt

E = market value company’s equity

D = market value of company’s debt

V = E + D

E/V = equity percentage of capital

D/V = debt percentage of capital

Tc = the corporate tax rate

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

Increasing stock price

Lower cost of capital Better media coverage

Improved employee morale,

vendor relationships

Greater ability to finance growth

initiatives and/or acquisitions

Improved growth opportunities

and profitability

FIGURE 1.2 Maintaining a Premium Relative Multiple

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 some-

The Capital Markets and IR 9

Perception and

understanding of

performance

20%–40%

Financial

performance

60%–80%

FIGURE 1.3 The Valuation Pie

thing 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.

GLOBAL IR

Companies are expanding their communications to foreign sources of capital,

and investors are culling a global range of investment opportunities. In

Two companies of similar size in a similar industry are growing

earnings at 20 percent annually, yet one trades inexpensively at a 10x

P/E multiple while the other garners a 20x P/E multiple. The former, in

all likelihood, has credibility issues or problems understanding the investment

community. The latter most likely understands the nuances of

communication, how to be economic to investment banks, and how to

preserve credibility in tough times. That’s the art of the stock market

and that’s what affects equity value.

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.

Once a pool of potential investors is identified, IR must think through

the issues that an international portfolio manager or analyst will have to

address to complete adequate due diligence. Additionally, if the investment

idea comes from a voice they feel they can trust—someone with whom

they have a relationship or who has experience in the overseas markets—

international marketing can be efficient. Companies should consider marketing

with a brokerage firm that has institutional salespeople who cover

that region. Thankfully, the investment bank consolidation of the 1990s

created many such banks with strong overseas presence, including Credit Suisse

First Boston, Deutsche Bank (formerly BT Alex. Brown), and CIBC

Oppenheimer.

Experience has taught us that investment opportunities tend to travel

better when a product or service of the company is already international.

Companies listed on U.S. exchanges that do a substantial amount of business

overseas have a much easier task translating their business, and thus

their investment merits, to foreign investors.

Many large branded companies, like Starbucks and Wal-Mart, have

had significant international business success and have also captured the

attention of foreign investors. Some emerging companies have also done

the same.

One good example is Quiksilver, the world’s leading purveyor of surf

and boardsport-inspired apparel and accessories. In 2003 institutional investors

were reluctant to pay a higher multiple for the perceived growth of

the rapidly growing global brand, so management wanted to cast a wider

net. The investment merits of this smaller-capitalization growth company

traveled well and attracted foreign investor interest due to their international

brand-name recognition. Any portfolio manager with kids, whether living in

France, Australia, or the United States, was probably buying the company’s

products, which made it easier to explain the investment opportunities to

foreign investors.

The Tangled Web

No company operates in a vacuum. Every decision ripples through the capital

markets. The sell-side, the buy-side, strategic partners, the media, regulators,

and the global community are all important constituencies to be addressed

by investor relations. IR with capital markets know-how is

invaluable to companies addressing these constituencies and helps to maximize

equity value.