How IROs develop pictures of their own companies for presentation to the CEO and board
There are so many tools available for stock surveillance, shareholder ID and peer analysis, it’s no surprise that one IRO recently described his office as looking like the inside of a Boeing 747. Data feeds are pouring in from Google alerts, Bloomberg screens, SEC filings and perception studies, giving companies more information than ever about themselves and their competitors.
IR, of course, has always been about communicating results out of a company, but the role has also expanded to include bringing reports back in. Some IROs are relishing their role as market intelligence officers. ‘I’m a competitive intelligence freak,’ admits Del Monte’s investor relations director Jennifer Garrison.
Fairchild Semiconductor’s senior manager of IR and business development Rodrigo Brumana says he finds the information-gathering aspect of the job critical. ‘We see the IR function as a two-way street, with great emphasis on what we bring back to the organization,’ he explains.
IR may have an increasingly quantitative bent because of the type of people being drawn to the function. Brumana and Garrison, like scores of other IROs, have experience on the research end of sell-side banks and are running their IR teams with a similarly technical approach.
Brumana even buys from service providers most of the tools analysts use. ‘Analysts have a very thoughtful way of seeing our business,’ he says. ‘We want to bring that intelligence in-house. Functioning like an equity research shop is, in my opinion, the most valuable service our IR department provides.’
What’s available?
The kind of information IROs are developing varies. A basic task involves compiling what’s been written about the company in the media or in research analysts’ reports. Some commission shareholder perception studies and dossiers on new investors from the likes of Thomson Financial, CapitalBridge or Ilios Partners. Others want frequent reports on the shareholder mix from stock-watch firms.
Intelligence efforts are about companies and their peers. Ownership is a big part of what IR does, and is one of the main things the CEO and board are looking to learn. IROs are preparing quarterly or weekly reports summarizing the top buyers and top sellers and details of why they are in or out.
There’s also a scanning of the players in the sector as a whole. ‘We help figure out questions from clients like, Why does Fidelity own four companies in our sector and not us?’ says Bradley Smith, a director at NASDAQ’s Shareholder.com.
Companies are also trying to see how their operations match up competitively. ‘We track 16 peers,’ Brumana says. ‘We are constantly looking at how much they are guiding their operations in areas such as internal inventory, channel inventory, pricing trends and new product introduction.’
The Fairchild IR team sends key internal constituents a BlackBerry message summarizing the news when peers report. ‘I want the product line to get this flow from the Street,’ Brumana adds.
IROs want the management and board to have the big picture, so they often summarize and circulate the messages in the best research pieces. Garrison says she picks one ‘bullish’ and one ‘bearish’ report for this purpose. Many are also tailoring specific alerts to board members with particular interests. ‘Intelligence is a daily event,’ Smith says. ‘Thinking of it in terms of ‘packaging’ is almost too quarterly.’
External providers
All this sounds like a lot of work. How much of it do IROs do themselves, and what is the input from service providers? Companies usually run the show, but still find service providers indispensable. Del Monte uses an outside provider to get a daily email on market intelligence in the packaged food space. ‘That kicks off the more detailed intelligence we do ourselves,’ Garrison says.
Brumana recently concluded a cost benchmarking study aimed at improving Fairchild’s gross margins. ‘We were trying to identify areas where we had an advantage and where we didn’t,’ he explains. The core of the findings came from conducting 31 interviews internally, but the IR group also pulled 10Ks and 10Qs and used tools from a provider to obtain analysts’ reports.
Outside providers work with clients to make sure their contributions flow in easily. ‘One of our chief principles is helping IROs own the information; that is, it’s not pass-through information, but material to inform reports, emails and weekly analyses,’ says Tim Quast, managing director of ModernNetworks IR. ‘We try to provide a well-supported view of equity drivers, what they mean for measuring IR programs and how current market structure will likely impact forward price.’
With big companies, Quast says he may provide an analytics group with ‘actionable items’ to feed up the chain. At smaller companies, he may be writing weekly reports to management and brief monthly comments to the board.
Often, contributions come via the long-running dialogue between company and service provider. ‘Yesterday, for instance, the board secretary of a small cap was in his car on the way to a meeting and we simply discussed key items so he could stand up and comment on the state of the company’s equity market,’ Quast says.
There is a bit of a management obsession with hedge funds and shareholder activists. With dissidents complaining about what’s arguably the best-run retailer, Target, and operations at megacap McDonald’s, ‘any company is fodder for activists,’ says Chris Taylor, a managing director at CapitalBridge. ‘Clearly, activism is at the forefront of clients’ minds.’
Profiling institutions and funds is something intelligence providers do every day. They write reports for the board and CEO focusing on the assets they wield, their history of activism and their approach to investment. Reports might be less formal. ‘It can be a lot of conversation, sharing of anecdotes and gut feelings,’ Taylor says.
If a hedge fund is making an entreaty, surveillance can show the overall risk that poses by putting the entire shareholder base into context. It can also help assess whether a company is a takeover target. John Grau, president of the intelligence and proxy advisory firm InvestorCom, says companies use his service to read investor mood. ‘It is a great way to gauge how happy shareholders are,’ he explains.
At its core, surveillance is a time-management tool. It helps IROs slim down the list of who should or shouldn’t be meeting the CEO and CFO. IROs are using this information to set their own roadshow agendas, getting around a traditional reliance on the corporate access teams of sell-side banks. ‘Companies are getting more assertive about who they want to meet,’ Taylor says.
Intelligence and small caps
Eddy Miller, a Montreal-based vice president at IR consulting firm Christensen, notes that small caps lack the staff and budget for the kind of intelligence gathering seen at the bigger companies. Having also been an IRO at several emerging biotech firms, Miller says executives and boards may not have an appreciation for what IR does. ‘They’re smart people, but they’ve been specializing in running their business,’ he explains. ‘They went public, but they may still have little understanding of the capital markets.’
In this case, small-cap CEOs and boards may need a basic IR education. The types of reports an IRO in this situation would give are those running down the IR effort, such as how many meetings there were with current and prospective investors. Detail like why they did or didn’t buy is good, Miller says. They can also summarize media coverage, as it can have a big influence on small-cap stock prices.
Small-cap IROs can work themselves up to the more elaborate reports done at large caps like those covering issues raised by analysts, valuation and variances from key metrics. They may not be able to afford an outside service to provide this type of research. ‘We’ll help them in setting up a template,’ says Miller. ‘They can then update it themselves and do maintenance each quarter.’
Other providers can also make services more affordable. Strategic Stock Surveillance, for example, offers monthly contracts for stockwatch and trading intelligence.
As the source of so much valuable information, IROs are finding their profiles rising within companies. Many are finding themselves the go-to person in the organization. This work also has a lot of overlap with what is being done in the business strategy groups, and some, like Del Monte, are coordinating research.
Brumana says the feedback is very positive. ‘The key for our success is that the CFO and CEO both support and recognize the value of our competitive intelligence effort,’ he notes.
Naturally, IROs also need intelligence on their own efforts. To this end Garrison periodically surveys the head of each business unit, asking questions like, ‘Are you using what we produce?’ and ‘What can we do better?’