How IR sleuthing has evolved from art to science
Catherine Forte remembers the 'old days'. 'We would pore over reams of Technimetrics listings, highlighting any fund manager running enough money to fit our investment parameters,' recalls the IR veteran, now associate director of IR at biotech firm Genzyme. 'Investment styles such as growth and value were not an issue. Afterward, we would consult the Nelson's books to read the investment manager profile, hoping it was up to date. That's how you made targeting assessments.'
Since that time in the early 1990s, the IR disciplines of targeting and stock surveillance, along with their ancillary handmaidens shareholder identification, profiling and perception studies, have come a long way. While new methodologies and technologies have helped IROs adapt to a new market environment, the basic goals of targeting and shareholder ID have not changed. IR professionals still use these disciplines to broaden and deepen the shareholder base, ensure management spends precious time with the 'right' people, improve the market quality of shares and measure the success of IR programs.
But the market environment has definitely changed. Investors are committing less capital and taking longer to do it. Meanwhile, every unemployed analyst seems to have started a hedge fund. At the same time, disenchantment with the sell side has led many companies to take their message directly to those who buy and sell their stock.
Yet when the outlook isn't pretty or just not visible, some IR departments are tempted to keep their heads in the sand. But companies competing for a shrunken pool of fast-moving capital must become shrewder. Most start by looking in the mirror.
Attracting new blood
'A key challenge for any IR program is to broaden and diversify your shareholder base,' says Forte, noting, for example, that concentrations can be unhealthy, especially in an environment where valuations are low. 'One way to approach the task is to look at your current shareholders. If you find, for example, that Fidelity is one of your smallest shareholders, you know it has the purchasing power to be a more significant holder. Since it already owns a piece of you, it may be receptive to a more concerted push.'
Indeed, few public companies give enough attention to their current shareholders. While an effort is made to sell stock, once that's done the temptation is to move on to the next new investor. But that's when a dialogue should be just beginning. 'Companies are like communities,' says Michael Brod, a consultant and former broker. 'And community relations are a critical component of IR.'
When that community changes, so too must IR. Typically, any company in transition can benefit from a targeting program. IROs know, a company may be a growth story one day and six months later it has metamorphosed into a value play. Sometimes, the change is deliberate.
Take Maine Public Service Company, an electric utility with a new CEO and a new growth strategy. 'We are using targeting to change the mix of our stock,' says Annette Arribas, marketing manager. To get the word out to existing as well as potential investors, Arribas is using an online database and contact management system to target key investors within certain market areas that it plans to roadshow.
Using different search criteria, Arribas scanned peer companies and obtained contact names of their investors. 'That way I can send invitations to those folks who might be interested in where we are headed,' she says. 'For those of us out of the mainstream – here in the tundra – modern targeting techniques are very cost effective tools.'
Another company going through change is Chicago-based auto insurance technology provider CCC Information Services Group. Having restructured, the company is moving from being a value opportunity to more of a growth stock. 'As the business strategy changes, so too does your targeting strategy,' says Patrick Donoghue, head of IR at CCC.
As a small cap, CCC uses its targeting consultant as 'an extra pair of hands'. 'Larger companies are likely to have the staff do a lot of the work in-house,' says Donoghue. While smaller caps rarely use day-to-day stock surveillance, it is a vital tool for those in transition. 'Because our company changed its financial profile, our shareholder base was turning over,' adds Donoghue. 'We use stock surveillance to get a quick handle on who is buying and selling the stock. That way you don't have to wait 90 days between 13F filings.'
Measuring IR
Indeed, stock surveillance is a key tool in measuring the success of an IR program. 'The stock price is still an important benchmark but you can't look at it in a vacuum,' says Paul Hebert of Citigate Financial Intelligence. 'You must look at it against what your industry or financial peers are doing, and see if you're getting a better valuation as a result of your efforts. IROs can use stock surveillance to see a quantifiable result of their targeting efforts.'
For all its other virtues, a targeting program has a singular benefit. 'You can get a lot of wear and tear on the road unless you are targeting well,' says Phil Smith, chairman of micro-cap Taser International (who once visited four cities each quarter as CEO of a Silicon Valley company). 'With all the noise in the market, you want to be sure you are meeting the right people.'
One group of investors prominent in all sectors of the market these days are hedge funds. Once considered pesky short-sellers or short-term holders at best, they're getting to talk to more IROs. John Karageorge, principal at Ilios Partners, suggests companies make a special effort to trumpet good news. 'Hopefully, they will cover their short and you can drive them out of your stock, ' says Karageorge.
Another reason to take calls, and perhaps even set up meetings with management, is that hedge funds are more a legal structure than an investment style. Many take long-term bets on a company. The trick is knowing who is who.
Tracking debt
This is not just about equity holders. For many companies, debt has become an important piece of their overall enterprise value. For that reason, fixed-income strategic intelligence has grown in importance.
'With the markets the way they are, IROs may believe they are beholden to equity holders. But a month later, lo and behold, you are beholden to debt holders,' notes Evan Klein, executive vice president of Thomson Financial's Capital Markets Intelligence. 'If you don't know who they are, things can get difficult.'
Meanwhile, debt holders burned by bankruptcies are clamoring for more information and accessibility to management. With the volume of debt-holder calls rising, IROs are taking over some aspects of the treasury function. 'Exactly as with equity holders, fixed income intelligence lets IROs know who is buying their bonds and why,' says Klein. 'That affects their ability to issue new debt or retire existing debt. All in all, it helps companies prioritize their time.'
No doubt, stock surveillance and targeting are becoming regular tools for a growing number of public companies. One estimate puts more than 2,500 companies now using some form of consultant service in these areas over the course of last year. Methodologies and technologies vary, but at the end of the day, a comprehensive targeting program blends many together.
Clariant gets in front
In 2001, 8 percent of Clariant's shareholder base was in the US. Today, 30 percent of the Swiss chemical company is in US hands. The reason? An effective shareholder identification and targeting program.
In fact, like many European companies, Clariant had only a vague idea of who held the company and why. In 2001, over 60 percent of its shareholders were unknown to management. Led by Iris Welten, global head of IR for Clariant, the company embarked on a program that, by September 2002, had identified over 90 percent of its shareholders.
'Shareholder identification – the basis for any targeting program – is hard to do in Europe,' says Welten. 'In the US you can get 13F filings as well as information from your NYSE specialist. European exchanges provide no information about block trades or short selling, and each country has specific disclosure requirements. That's why it's tough to find holdings here.'
What the experts say
Real time
'Once stock surveillance was a response to hostile takeovers. But companies quickly recognized the practical day-to-day benefits of identifying and understanding their shareholder base. Today, done right, surveillance is a proactive activity. Speed is crucial. If someone is selling your stock, you want to be able to call them and clear up any misperceptions. Moreover, in this volatile market, old data – particularly 13F data – can be utterly unrepresentative of your current shareholder base when it comes to targeting.
Companies have become price sensitive and increasingly favor providers with a consolidated offering. To that end, we are rolling out our online product, IR Navigator, in June. It will feature new proprietary databases of ownership information, contact and profile data along with a contact management and tracking system.
In this business you need a global approach and we will open a London office in May. But one way or another, Ilios Partners will remain a boutique provider that prides itself on giving its clients personalized attention.'
John Karageorge, Ilios Partners
Full circle
'We have completed the circle between stock surveillance and targeting. We've just introduced iTarget, a new targeting module available through IRChannel, Thomson's integrated, online IR workflow solution. iTarget lets you analyze current and prospective shareholders to make buy-side outreach more effective. The beauty of it is that it is global, interacts with our contact management system and provides real-time share positions as opposed to 13F filings.
The iTarget system incorporates industry peer exposure, financially comparable peer exposure and portfolio fundamental compatibility to assign a score to each institution. It looks at the purchasing power impact each institution could have on your stock. Both give you the best idea of how much impact a particular institution can have on your shareholder base so you can prioritize your time more effectively than just doing a standard search and sort.
While we let you segment the buy side in your own way, we can also provide the extra level of ad hoc reporting and support that an analyst brings to the table.'
Evan Klein, executive VP of Thomson Financial's Capital Markets Intelligence
People first
'We not only provide clients with market intelligence but give advice on what to do with that information. Doing so effectively means having an organization with a significant number of people coming from an IR background. They know the language and how to make the information actionable. In this business, people come first and technology second. The key to good service is to keep people for the long haul. We have extremely low staff turnover. Providers will argue about methodology, but the real value-added of a targeting program is the person supporting it. Ultimately, a good targeting program should include a balanced proportion of technology, methodology and service.'
Paul Hebert, head of Citigate Financial Intelligence
Retail edge
'In January, we launched Institutional Reach Gold. Thomson Financial built it and it is similar to IRChannel. However, our solution encompasses both institutional and retail investors. Naturally, investor relations officers want to spend most of their time courting institutional investors. We are saying it is just as easy to target the almost institutional high net worth market as well. Our targeting is based on people who have asked for information on certain companies.
The importance of retail investors is often overlooked. Every IR program needs a balanced approach because if you don't have a core of loyal retail investors (who are likely to vote with management), you may have problems. Retail shareholders provide liquidity but won't drive the share price enough to make it volatile.
Meanwhile, the trend toward more non-block trades on Nasdaq is clear. While many younger investors may have stopped researching new investments, our research shows the more experienced ones – and those with larger portfolios – are still making investments.'
Pat Galleher, chief operation officer of WILink