Targeting investors: a disciplined approach

Open and honest communication is the cornerstone of targeting.

Editor’s note: This special research feature is sponsored by Global Consulting Group (GCG)

When Lukoil, an international energy company based in Moscow, embarked upon a
three-year strategy to strengthen its fundamentals and shed its image as an emerging markets player, a key part of its vision was targeting a wider range of long-term investors. In the past year Lukoil has had more international investors buying its shares, leading to some stellar results. The price of its ADRs increased 60 percent in the first eight months of 2005, far exceeding the 15 percent to 20 percent growth experienced by the broader energy market, according to Gennady Krasovsky, head of IR at Lukoil. ‘One
of the main drivers for investors is to find a good story,’ he says. 

But marketing will succeed only if a company has done its homework, Krasovsky points out. After Lukoil improved its business model and made its information more transparent, it actively sought US and European investors by initiating one-on-one meetings, conference calls, field trips to its facilities, and roadshows. ‘You can create a good story, but if the financials don’t support it, your story will make no sense,’ Krasovsky maintains. 

Targeting investors is the cornerstone of any well-run IR effort. ‘Investor relations is a form of marketing, and we are marketing a financial instrument,’ says Anne McBride, founder of the Anne McBride Company and now vice chair of IR at Global Consulting Group (GCG). She also points out that today’s public companies must compete for attention against 13,000 other US listed companies. ‘You have fewer analysts, fewer market makers, and many more companies vying for institutional dollars,’ she observes. ‘The right message is critical – but if you are not bringing that message to the right audience, it falls on deaf ears. This is why targeting is essential.’ 

An inward glance
Aladdin Knowledge Systems, an Israeli digital security company listed on Nasdaq since 1993, redoubled its investor targeting efforts after the tech bubble burst and its stock went from a high of $42 to a mere $0.82 per share, recalls CFO Erez Rosen. At that time, Aladdin hired GCG and began strengthening its communications skills and investment message. ‘We believe we have a fantastic story but we had to make sure the market knew it,’ says Rosen. ‘So we worked on creating press releases, scripts and corporate presentations.’ 

This type of messaging is central to any savvy targeting program, notes Erik Knettel, deputy director of GCG in Manhattan. ‘You need a good roadmap of where the firm is going,’ he says. 

For Lukoil, a full-blown targeting strategy was launched a year ago and revolved around identifying quality institutions that either held positions in energy companies similar to
Lukoil or invested in Russian or Eastern European companies. The strategy worked. Krasovsky notes that his company’s trading volume has doubled since 2003. He also says that instead of a shareholder roster full of speculative investors, Lukoil stock is now held by an array of global and pension funds with an investing horizon of one to three years. 

Before approaching potential investors, it’s important to create some metrics for them to benchmark against. McBride suggests these financial metrics should help investors gauge whether or not a company is delivering on its business plan. 

However, companies also need to establish a calendar, mapping out their targeting strategy for the coming year. McBride recalls her experience as an IRO, when she’d begin the year by assessing her company’s existing number of analysts and institutions and then set quantifiable goals for the number of new analysts, institutional investors and retail investors she wanted to attract over the next twelve months. 

Although the actual goals will vary, some rules of thumb exist. McBride emphasizes the importance of balance in a company’s shareholder base. You don’t want to be too
dependent on one or two institutions, especially index funds or quantitative investors that usually exit once their targets are met. US consumer companies, McBride points out, typically desire a 50-50 mix of institutions and retail investors, while international companies might seek a shareholder base that reflects the geographical distribution of their revenues. 

Making life easier
Although an investor targeting campaign might hinge on high-tech databases, the overarching goal is simple. ‘Making the life of the institutional investor as easy as possible is the primary focus of IR,’ says Knettel. ‘The core of targeting is to maximize one of the scarcest resources for both senior management and institutional investors: time.’ 

One way a skilled IR consultant can save time is by analyzing the various databases and narrowing the universe of potential investors. ‘You don’t want to pull in investors that are potentially hostile toward senior management, investors with extremely high turnover rates, or investors whose strategy is shorting securities,’ says Knettel. 

On the other hand, the best targeting firms are open-minded. Recently, hedge funds have emerged as a force to be reckoned with and, although still varied in quality, some have shed their short-term focus. ‘The community has become so large and the assets so much bigger that many investment professionals from the traditional investment community and sell side have gone into the hedge fund community,’ notes Knettel. ‘And in some cases they’ve become more like long-term investors.’ 

Finally, top management must commit to meeting its best prospects face to face. Rosen estimates Aladdin’s management team participated in more than 500 meetings with potential investors in the past two and a half years. ‘We were really salespeople for the company, and it helped,’ he explains. ‘More investors looked at our company and we now have a nice group of long-term shareholders.’ 

A holistic approach
Although meeting with the buy side can be immediately gratifying, it’s equally important to cultivate sell-side analysts. Knettel urges IROs to consider analysts beyond the primary analyst in a given sector. ‘Secondary analysts and associate analysts are literally the next generation,’ he observes. ‘When the primary analyst leaves, they step up.’ Knettel also advises exploring all sell-side avenues from regional brokerages to independent research firms to global research houses. ‘You want diversity and blend within your sell-side analyst base,’ he adds. 

Rosen agrees. Even though analyst coverage has declined in the US in the past few years, Aladdin now has eight analysts covering its stock, compared with none in the not-so-distant past. 

An investor targeting program will flourish only if the company makes good on its promises. Rosen perceives Aladdin’s investor outreach efforts as an outgrowth of its overall philosophy. ‘Everything we said, we stood behind,’ he says. ‘If we said we’d grow, we grew.’ 

In conclusion, he emphasizes the importance of communicating openly and honestly. ‘We made the assumption that every word we said was being written down by someone,’ he explains. ‘If we returned to that person, we should be credible. That’s how you create long-term relationships. It’s a must.’

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