IR's changing business model
In a networked world, the old ways of doing business are creaking to a stop. The boundaries between buyers and sellers are breaking down and old distribution models, with layers of intermediaries adding to margins, are unraveling. Those that simply take something from A to B without adding value will see revenues wither. Meanwhile, nimble competitors use new technologies to attack the most profitable areas of established businesses.
Investor relations is no exception. The ability of companies to directly contact the buy-side via the internet has forced IR intermediaries – from proxy solicitors to annual report designers to strategic consultants – to come to terms with this new link.
The net future promises opportunities as well as perils for IR providers. Those entities that recognize and adapt to cybertrends will be the survivors. And that will mean morphing into a new business model.
The phenomenon of disintermediation – or eliminating the middleperson – has resounded throughout financial services, with retail brokers and sell-side analysts among the early victims. Once the gatekeepers of the relationship between corporate IR and the investment community, large-cap IR departments mostly now have direct relationships with their biggest buy-side holders.
Likewise, in a world where the doors to the datamart are open to all, traditional retail brokers are having to recast themselves in a way that adds value. With one in four US retail trades executed online, cyber brokerages continue to pick off market share while watching their own stocks soar to record highs.
Investment banks are also acutely aware that IT developments have allowed their clients to communicate directly with issuers. Internet IPOs are a reality and, in response, a flurry of firms is aggressively pursuing plans to underwrite stock offerings via the internet.
Altogether, the net has brought radical changes to the way companies work – changes hard to imagine only a few years ago. How they will affect investor relations in the future is even harder to predict. But this at least is certain: no-one is sheltered from non-traditional competitors using new technologies to better serve investors.
Weathering cyberchange
The least impacted are probably investor relations firms focusing on strategic communications. Current cyber-orthodoxy says that because they provide content they will keep their place in the chain – provided they retain a hold on the intellectual capital.
'The content still must be created,' says Jim Sansevarino, managing director of Citigate Dewe Rogerson in New York. 'And, in a world where everyone has equal access, content will be the differentiator.' In fact, says Sansevarino, the net forces strategic communicators to be even more strategic. 'It begins a one-on-one dialogue, so it is important the communication should be specific,' he says.
For an IR firm specializing in roadshows, direct and easy connections between management and investors might look like a challenge. Michael Bamforth, a partner at Brussels-based Kuhn Partners, admits he was concerned, but says the new technologies have yet to display much impact on his business. 'People still want to travel and do business in person,' says Bamforth, who notes that US web surfers can never enjoy a good European meal or experience the excitement of Wimbledon on screen.
New industries
While traditional enterprises struggle to adapt, the web is spawning new companies and new industries. Broadcast.com, for example, provides streaming audio and video technology for quarterly earnings broadcasts. Direct Stock Market has carved out a niche as a 'virtual roadshow' specialist for small caps.
Corporate Communications Broadcast Net-work also offers interactive tools for companies' IR web sites. 'Those who in the past added no value yet simply had points of dissemination no-one else could match, will find the internet quickly levelling the playing field,' says Robert Adler, president of CCBN.
On the other side of the world, Asian companies too are discovering the benefits of the internet as an IR tool. However, in places like Japan, for example, hard times combined with a management style of cautious consensus building is slowing development.
However, the more intrepid players are staking out turf, reinventing themselves in the process. Tokyo-based General Solutions Inc, a producer of English-language annual reports, has since 1996 had a small but growing e-business, charging a fee to download annual reports. In January 1997, some 400 were downloaded from its site (www.gcis.com); this March, that number was up to 9,000. 'We give companies an inexpensive way to get their message on the web,' says Lawrence Patrick of General Solutions, which has also begun producing home pages for Japanese companies.
Net broadcasts
However, quarterly reports for Japanese companies are a little harder to come by. The US investment community has praised Sony for making its quarterly reports available on the net; and Yas Hasegawa, IRO at Sony USA, says the company is considering extending its internet reach by broadcasting conference calls over the net. 'Many fund managers use the internet,' comments Hasegawa. He had that confirmed when a message about Y2K readiness appeared on the site and it quickly engendered a slew of phone calls from investors seeking details.
Investor relations officers themselves are not immune from disintermediation, either. As investors and analysts flock to the net for information, companies with no web presence face being ignored. A solid grasp of new technologies and marketing strategies is now critical to any IRO's resume.
The upside for corporations is clear, starting with issues of efficiency and disclosure. Carla Lewis, vice president of investor relations at Microsoft, notes IR staff can refer callers to Microsoft's site for detailed information. While saving time, Lewis says phone conversations with analysts and investors are more meaningful because they begin 'on a higher plane. [A web site] also helps gain broad disclosure of investor information,' adds Lewis.
For Luis Echarte of Mexico's Grupo Elektra, internet-based IR is the 'wave of the future'. Elektra's corporate site is being significantly upgraded. With internet communication, Echarte expects to save hundreds of thousands of dollars in phone and fax bills. He keeps a database of present and potential investors and e-mails advisories on company news with an invitation to link to the company's home page for more information. 'I want to do all my communication via the internet,' says Echarte. 'Investors are getting more comfortable about the web. A year ago, I couldn't even get people to look at our site.'
With a site rich in current and useful data, corporations can make themselves the first place investors look for information about the company, thereby reducing the number of intermediaries and filters. But are all those intermediaries really so indispensable? Lightly staffed, IR departments often rely on consultants to efficiently streamline various parts of the IR function. However, new technologies mean many of those areas can be brought back in-house.
'The web restores the privacy between buyers and sellers,' says Ross Kaplan, an attorney and writer on investor relations and the net. 'If third parties are between companies and shareholders, one must ask who owns that relationship.'
New for old
For now, the quickest way to get up to speed is to call a vendor, but Kaplan believes as the technology becomes more ubiquitous, companies will turn to internal resources for most web efforts. Still, for now, while the theory holds that the internet is the prime catalyst for disintermediation of consultants, the reality is that new sorts of intermediaries are springing up daily. Take CCBN. While some complain it adopts a 'cookie cutter' approach, its chief allure is the fact that it gets corporate IR sites up quickly and relatively cheaply. And, with some $3 mn in revenues last year, that turnkey business plan appears to be working.
Xerox, a pioneer in web-based IR, has the resources to do virtually all its web development in-house. Still, it now outsources its stock quote and analyst estimates information to CCBN. 'It was simpler to outsource that particular function,' says Chuck Wessendorf, IRO at Stamford, Connecticut-based Xerox. 'They offer efficiencies in the sense they do something similar for a bunch of companies.' That service providers must develop new skill sets was underlined when Xerox hired a San Francisco firm to help it redesign its overall corporate site. Wessendorf isn't entirely thrilled with the result. 'They focused on e-commerce but didn't know IR at all,' he says.
One communication tool under siege at Xerox is the fax. Take earnings release conference call invitations. Xerox sends up to 200 invitations to analysts and fund managers via fax and e-mail. But Wessendorf says he's getting ever more requests to send the invitations strictly by e-mail. 'We are increasingly communicating with our key sell-side analysts and buy-side by e-mail,' he says.
Wessendorf's experience jives with the results of recent research by the US Association for Investment Management and Research, which shows 46 percent of those surveyed preferring to receive notice of a conference call via e-mail while 39 percent prefer fax.
But Wessendorf points out IROs should be aware of a potential problem posed by the internet's direct link between investor and company. 'We originally set up our web site to focus on the institutional investor, but we are getting more and more e-mail from individual shareholders,' he says. 'Many can be handled by shareholder services, but keeping up with legitimate investment questions can be difficult.' For that reason, an e-mail box no longer pops up when a surfer clicks on Wessendorf's name.
Retail rebound
The trend toward online share purchasing has focused many an IR department's attention on the retail component of share rosters. Often accused of adding day-trading volatility, a properly-managed retail shareholder base can contribute stability to stock price while providing a block of management-friendly votes come proxy season. The benefits of affinity marketing also tempt corporate strategists.
The problem has been that retail shareholders were expensive and time-consuming to service. Moreover, communication channels were murky with some two-thirds of individual investors cloaked in anonymity. However, the internet has become a powerful tool to attract, manage and communicate with them.
'With an investor's e-mail address, companies have a direct umbilical cord to the buy-side,' says Paul Vogelheim, director of business development at OTA Off The Record Research. 'Meanwhile, electronic communication, such as the dissemination of annual reports or proxy materials, can save thousands of dollars in the effort.'
Netstock Direct is one company that has created a new and dramatically growing place on the IR value chain. Its web site is currently the only central marketplace on the internet bringing together companies and investors with online registrations for direct stock purchase plans. 'Investors don't wait weeks to get your company's paper enrolment info,' says Catherine Corley, vice president of corporate communications at Washington-based Netstock Direct. 'All the paperwork is done immediately.'
For John Wilcox, chairman of proxy solicitor Georgeson & Company, it is the paperwork that the web handles so elegantly. Wilcox believes the next phase in the evolution of corporate governance will be dominated by technological change. 'The paper proxy card as we know it is not going to be the preferred voting method much longer,' says Wilcox.
Paper chain
But it is too soon to consign paper to the trash heap of history just yet. People like Richard Scotti, at Manhattan-based Scotti Graphics, the world's largest proxy card printer, are not about to give up without a fight. While challenged by electronic voting technologies, Scotti is expanding operations. 'People will always like paper,' says Scotti. 'People misuse technology and things like e-mail, for example, are becoming a disaster.' He stresses that interconnectivity issues have yet to be resolved.
'Our shareholders tell us internet proxy voting is nice, but they still want the printed copy in their hands,' says Bill Coote, treasurer and head of investor relations at Bowne & Co. Coote has a unique perspective. If any company seemed sure to slip under the cyber-guillotine it was Bowne & Co, the world's largest financial printer. Instead, Bowne has embraced the internet, transforming itself into an 'information empowerment' company. 'In our case [the internet] has turned into more of an opportunity than a threat,' says Coote. 'Today we look for communications solutions, not just printing solutions.' In the last year, Bowne has bought a half dozen internet companies and is positioning itself to be a market leader in cross-border financial communications.
Interestingly, Coote notes that Bowne's web site has brought an unforeseen dynamic to IR communications. While expecting to use the internet site to refer phone callers to more detailed information, the reverse has proved true. 'I get more phone calls from investors who look at the web site first,' says Coote. 'The site has become the vehicle through which investors are establishing a closer relationship.'
So, while the web lets buyers and sellers interact directly, there will always be a place for intermediaries but they probably will not be the ones we expect. As for investor relations officers, closer contact with the buy-side means developing new skill sets, not the least of which is a familiarity with information technology and the changing role of investor relations service providers.