Investors in innovative high-tech companies are buying dreams. The IROs of those companies often have to deal with nightmares
Imagine being the investor relations officer of Apple Computer, an icon of American business that has fallen on hard times. For an IRO it could be the biggest headache in the world or the best possible career opportunity.
Apple is a prime example of the vagaries of technology stocks. Exaggeration rules and no one can be sure which company will be on the front seat of the roller coaster next week, or even tomorrow.In early February, Apple's stock was selling at $27 a share, not much higher than half its 52-week high of $51. Its problems are real - even Apple admits that - but do they warrant the 50 per cent drop?
An example of the exaggeration: A leading US newspaper described Apple's fourth-quarter loss of $69 mn as 'huge.' In reality, that $69 mn is only 7 per cent of Apple's $1.1 bn in cash.
But this is the environment that faces IR directors of most technology companies, from IBM to those that only recently went public. Even stocks that generally sell at incredibly high multiples are not immune to the dramatic ups and downs that characterize the sector.
Even the fabulous Netscape, the Internet software company whose price went through the roof immediately after going public last August and which remains a sweetheart of the investment community, suffers its sharp ups and downs. In the 40 days between January 22 and February 9, for example, its price tumbled almost 19 per cent.
So how does an investor put a value on such a stock? Like many high-flying technology stocks with little earnings to speak of, Netscape trades on investors' dreams and hopes - perhaps the key characteristic of the technology market.
'We have a big bet that we are in the midst of a major industrial revolution,' says Ron Scott, a broker at New York-based Nubian Asset Management. Many investors and brokers, like Scott, compare the technology industry to the early days of the automobile business, with each trying to find the modern-day Ford or General Motors. And, despite their overall optimism, they also remember that there were scores of once-popular auto makers that failed. Not surprisingly, it takes very little to send technology stocks soaring or plummeting.
Is there a 'sanity range' for a stock whose P/E ratio is infinite and whose price relates more to dreams than to a solid track record, or to a clear view of the future? Asked if he worried that Netscape's stock price might be too high at times, Quincy Smith, the company's IR director, chuckled and replied: 'You don't expect me to answer that, do you?'
Many investors, of course, play on the market's volatility, which tends to amplify it. Fidelity's giant and, at least until now, highly successful $1 bn-Magellan Fund had been heavily invested in technology stocks last year. On November 1, its technology holdings represented 24.5 per cent of its portfolio. By the end of December, the ratio had dropped to 8.4 per cent, indicating that Magellan alone dumped about $16 bn of technology stock holdings in a single month.
It's difficult for an IRO, or anyone, to know just what any big money manager might do with his or her portfolios. Robin Carpenter, a stock analyst based in Hanover, NH, predicted Magellan's move early. But he admits that 'it's slow and hard to detect.' Carpenter said he discovered the shift at Magellan when he noticed that the fund's price behavior 'wasn't wiggling like a tech fund anymore.'
For IR officers, the volatility takes some getting used to. 'When I made the transition from MCI to Microsoft, I moved from a company where if the stock climbed a dollar a day, that was a big move,' says Connie Weaver, senior director of IR for Microsoft. But, 'when you get to a place like Microsoft, if the stock moves up a dollar or two a day, you don't even pay attention to it because it seems like the normal course of action.'
Like Weaver, most IR people deal with the dizzying price velocity by ignoring day-to-day movements in their stocks - especially if the movement is in line with that of other technology issues. If you concern yourself about every day's movement, 'it will drive you crazy,' Weaver warns.
For this and other reasons, Spencer Davis, director of investor relations at Computer Sciences Corp, contends that heading IR in the technology area is more demanding than in most non-tech industries. Before joining Computer Sciences - which assists governments and big corporations in integrating their hardware and software systems and strategies - Davis was an IR officer in the health-care and entertainment industries.
He says it's much tougher to deal with analysts in the technology field than in most others. 'If I'm talking to a health-care analyst, he or she will know the health-care industry relatively well, but I wouldn't get a question about the five different ways one might do surgery. But I get the equivalent of that kind of question in the technology business,' he says.
Davis believes that tech-stock analysts have little choice because of the rapidity of change within the industry. He cites the introduction last year of the Java programming language for the Internet, which was developed by Sun Microsystems. 'In two weeks it was licensed by IBM and Microsoft, so it became instantly the developer's program of choice,' Davis says. The event was pivotal because 'that singular movement suddenly changed' the outlook for much of what is expected to happen to the Internet over the next two or three years, he says. 'If an analyst weren't familiar with why a program like Java would be of interest, or of why it would work, he or she could miss out on an important shift in the market.'
Of course, there are plenty of examples of tech companies that have done poorly. Currently, it's Apple's turn. But IBM and Digital Equipment Corp have had their days at the bottom of the market, too. Both have since made a comeback.
One company that has struggled lately is Cray Research, the supercomputer manufacturer. Last year, Cray's revenues dropped to $676 mn, from $921 mn in 1993; and it experienced a $226.3 mn loss, including a restructuring charge of $187.6 mn that reflected in part a 13 per cent reduction in the workforce.
Numbers like that gave its IR director Brad Allen an especially tough job and, as we go to press, appear to have led to the acquisition of Cray by Silicon Graphics Inc. Allen is a veteran of such problems. Before joining Cray, he worked at DEC during the time when it was digging itself out of its hole. Allen says his job at Cray has been easier than at DEC because DEC was a much bigger company and had a much larger float, making its stock more volatile. Also, there were a lot of options out on DEC, which add to a stock's volatility and tend to breed rumors, which are always extremely difficult for an IR officer to handle.
When Allen spoke to Investor Relations - before the takeover was announced - he described his primary job as being to communicate two ideas to investors. The first, was to try to establish some realistic yardsticks and to remind people of what yardsticks constituted progress. It's important, notes Allen, 'that they are not holding you to standards that they have created.'
His second challenge was to convince investors that the company had a plan and was changing internally. Such challenges are not unusual for IROs at high-tech companies, where management considerations are often suspected - at least by the investment community - of coming a poor second to technological zeal.
Many such companies owe their very existence to the combination of techno-wizardry and entrepreneurialism embodied in the individual who first launched them. As their companies grow, the markets worry - often rightly - that those individuals are less at home running bigger businesses than they were with the garage operation where it all started.
Cray's story epitomises all this. Based in Eagan, Minnesota, the company was started by a brilliant and creative engineer, Seymour Cray. He had been with Control Data Corp, where he developed ever speediermachines, but he left CDC to form Cray Research in 1972 when CDC put a computer he was developing on hold.
Some years later Cray relinquished the top job at Cray Research and he soon began working on another pioneeringly powerful machine. Because developing that machine was so risky and costly, it was done through an affiliate of Cray Research, Cray Computer, in which IBM took a piece of the action. Cray Research eventually sold its share, and last year Cray Computer filed for bankruptcy.
The similarity between the two names, and the fact that the man who founded Cray Research is the same one who started the now-bankrupt Cray Computer, provided Allen with yet another complication. 'Just one more challenge,' he says.
On the management side, Allen says Cray's particular problem was that 'we failed to move our cost structure'. Under new management that took over early in 1995, the company began cutting costs and trying to transfer its expertise to new markets - for example, by trying to sell Cray computers to bank trading rooms where there is a critical need to combine huge databases with rapidly changing market prices.
Heading that new management team at Cray was Philip Samper, who had been with Sun Microsystems, the company recently reported to have been seeking to buy Apple.
Apple, of course, is the story of the moment - an $11 bn company whose share of the desktop computer market has been shrinking, and which reported a loss in the fourth quarter. It's expected to report another loss for the first quarter of 1996. Following the brouhaha about Sun's possible takeover of the company, and talk of an offering price of only $23 a share compared with its pre-rumor market price of almost $32, confidence in the computer company plunged.
In response, Apple's board replaced CEO Michael H Spindler with Gilbert F Amelio, who turned around the once deeply troubled National Semiconductor Corp.
Now, what to do at Apple? IR people interviewed (none would speak for attribution) agreed that Bill Slakey, Apple's investor relations director, has an incredibly tough job ahead of him - and most thought his options had been limited.
But did Slakey make a mistake in not responding to rumors of an Apple takeover by Sun Microsystems? Events began getting out of hand when The Wall Street Journal printed a story saying that Sun was offering $33 a share for Apple, which was around Apple's selling price. That story was followed a few days later by one in The New York Times reporting that Sun was offering only $23 a share. The papers fought back and forth over the price, with The Journal eventually backing off its claim.
The battle left the impression that Apple was in severe trouble, that it could not survive as an independent company. When the reported merger talks ended without agreement, Apple's reputation - and its stock price - were in tatters.
Should Slakey - who failed to respond to numerous phone calls - have reacted to the rumors earlier, before the worst possible scenario took hold? 'What you've got is news and rumor on the company and your ability to respond is somewhat limited,' said an IR professional at another tech company.
'It's hard to say whether Apple should have said something earlier,' said another. 'You're always better off trying to get as far down the road before saying anything because public reaction tends to get way out of control if a response comes too early. Unless there's some benefit, it's always better not to let it play out in public. You lose control over what is happening. It starts to be sensationalized, it's like a snowball, and if you comment on one, you've got to comment on future ones.'
According to another IR expert: 'It's a critical time for Apple. It will become a case study. This situation has nothing to do with the company's credibility. It has to do with whether the company has a strategy. What will the new guy do? How much time will they give him to turn the company around?'
In less than a month, Apple seemed to be making progress and moving toward developing a strategy. It announced in mid-February that it had greed to license its Mac operating system to Motorola, and allow Motorola to license it to subcontractors. Motorola's sales effort would be primarily in China, where only a tiny proportion of the population owns computers, making it a huge and wide open territory.
That move was greeted warmly by investors. The stock soared almost 5-1/2 per cent to $29 a share on the Tuesday morning following the Motorola announcement, up $1.50 from Friday's close of $27.50 (the markets were closed theat Monday for the President's Day holiday). Motorola fared well, too, up 2.7 per cent to $56.75, from $55.125. And the progress continued. By February 22 Apple was at $30 a share, not far short of its price before the Sun takeover story started flying.
But that doesn't mean Apple's problems are all in the past. And most IR professionals, especially those in the high-tech industry, look with sympathy on Slakey. They know that some day they could be in a similar position.