Elizabeth Judd considers the different IR options available to companies preparing to join the public markets
In 2010, when Chefs’ Warehouse began preparing to go public, management realized that its personal strengths – delivering high-quality specialty food to restaurants – wouldn’t necessarily translate into telling a story that would wow institutional investors and Wall Street analysts.
‘We knew we would be communicating with a different constituency – the investor market – and we wanted to bring in somebody with expertise to do that,’ explains chief operating officer Jim Wagner.
The company soon began interviewing outside IR consultants to help hone the message for the S1 and later for roadshows, quarterly conference calls and investor luncheons.
Once Chefs’ Warehouse chose ICR, the financial communications firm helped the food-service company with everything from selecting investment banks to deciding to list on NASDAQ.
ICR helped management formulate an effective slide deck and hone its investor presentations. Before its first conference call, ‘we all prepared relentlessly,’ recalls Wagner. ‘The knowledge ICR had of the market we were presenting to helped us craft and tighten our message to get it across to investors.’
IPOs are on the upswing after the deep freeze of 2008 and 2009. In 2010, 154 US IPOs with a market cap above $50 mn were priced, and, at least until recently, activity in 2011 was keeping pace, with 96 US IPOs priced from January to August, according to IPO specialists Renaissance Capital.
Historically, many companies have scrambled to find IR help just prior to their IPOs, and some even went public with no IR plan in place. That’s now changing.
‘There are significant processes and procedures that need to be in place prior to the IPO to be successful as a public company over the long term,’ says Alex Wellins, co-founder and managing director of the Blueshirt Group, based in San Francisco. ‘An IPO is not the finish line. It’s the starting line for your life as a public company.’
To hire or to outsource?
Large companies and those that anticipate – or lust after – sizable analyst coverage sometimes hire an IRO before going public. For many, however, the chosen course is to use an external IR firm.
Consultants can offer IPO-specific help during the IPO process, allowing companies to sort out who will wear the IR hat later on.
‘There’s quite a lot of variety when it comes to companies going public,’ says Jay Ritter, Cordell Professor of Finance at the University of Florida. ‘Some firms care a great deal about visibility with the investing public; others don’t. There’s no one-size-fits-all model.’
Lise Buyer, founder of the Class V Group, an IPO advisory firm based in Portola Valley, California, points out that choosing whether to hire an internal IRO or use a consulting firm depends on how lean a company is.
Usually, she notes, hiring a full-time IRO represents a larger financial commitment, while using an investor relations consultant gives a company greater flexibility.
‘There are so many gifted IR people, but for the most part they’ve been doing investor relations and aren’t well versed in the nuances of the IPO process,’ Buyer says.
So a company might prefer to hire an IR consultant with extensive IPO expertise to handle the initial phases, and bring in a full-time IRO later.
IR consultants vary, too: some are hands-on, perfectly equipped to sit in on executive committee meetings, while others specialize in overseeing logistics or other discrete tasks. Knowing what you need usually hinges on the management team.
‘If a CFO likes to craft strategy, speak at all the conferences and run the show, his or her firm is not looking for the same IR help as the one whose CFO doesn’t like to interface with investors,’ says Buyer.
Some companies decide to outsource during the IPO process and the first months of being public with the expectation of bringing in a full-time, in-house IRO in the not-too-distant future.
‘Our thought was that we would use an outside firm for the IPO and the first couple of quarters afterward,’ says John Keatley, CFO at Green Dot, a prepaid financial services company that went public in July 2010.
‘That gave us a good sense of our needs and the volume of the work, and we also got a sense of the kind of person we’d need when we ultimately hired a full-time head of IR.’
For many newly public companies, hiring an external IR firm is a way for the CEO and CFO to stay intimately involved in IR at a critical moment in a company’s history.
‘Our CEO and I were willing to shoulder more of the burden early on, especially if we had the help of an outside firm,’ explains Keatley.
At a certain size, many companies contemplate an internal hire. ‘When a firm reaches around $2 bn market cap and has 15-20 analysts covering it, hiring an internal IRO makes a lot of sense,’ says Wellins.
Although most companies understand they need IR help prior to going public, managements are getting assistance earlier and earlier. SodaStream, maker of the household appliances for carbonating drinks, engaged KCSA several months before going public in the US.
‘One of the big challenges newly public companies face is quarterly earnings calls,’ says Jeff Corbin, CEO and managing partner at KCSA Strategic Communications. ‘When SodaStream went public, its first conference call was just weeks away.’
KCSA prepared a mock press release and staged a dress rehearsal so when the real event rolled around, ‘it made every aspect of the earnings call that much easier,’ Corbin says.
‘Companies are busy, so to have the CEO and CFO devote time to this made a statement to analysts that they were taking IR seriously.’
When to bring in help?
Wellins advises management teams to line up IR help anywhere from six to 12 months before going public. Don Duffy, president of ICR, agrees that bringing in IR help as much as a year in advance can be advantageous. ‘There may be some groundwork for a company to do prior to filing an S1,’ he says.
Buyer disagrees, arguing that securing IR help immediately prior to the first roadshow is time enough. ‘There are so many details of the filing process that come into play that the time to think about investor relations is right before you have new investors,’ she says. ‘Too many companies bring in people too early, when there’s too much else to do.’
When interviewing a prospective IR consultant, key questions include how many IPOs it has worked on and whether it has experience in a company’s particular industry. Buyer advises companies to interview between three and six prospects.
Finally, selecting an IR consultant often boils down to comfort. ‘After determining that an IR firm has the right capabilities, it’s all about chemistry,’ says David Calusdian, executive vice president and partner at Sharon Merrill.
Over time, the line between hiring IR help internally and outsourcing IR has begun to blur. Often, consultants place their names on press releases so investors might not even know whether they’re speaking with an employee or an external IR firm.
Calusdian says internal and outsourcing models for IR ‘aren’t mutually exclusive anymore.’ Companies may hire IR firms to train internal IROs on the intricacy of the IPO process, or use an IRO to field calls while a consultant provides strategic counsel.
Almost everyone agrees the wealth of choices means fewer CEOs and CFOs are finding themselves tongue-tied when faced with their first quarterly earnings call. ‘Investment bankers are concerned with getting the deal done,’ concludes Corbin.
‘Someone needs to be thinking about the day after, too, and there’s value to having an objective IR consultant on the sidelines, preparing you.’