Seek out companies with rapidly evolving strategy and find savvy IROs going with the flow
A funny thing happened to Bob Gallant on his way to work one day last January. Just several days into his new job as investor relations director at Hercules Inc, the Wilmington, Delaware-based chemicals giant, Gallant walked into a fierce bidding war between his bosses and Switzerland's Ciba Specialty Chemicals over Allied Colloids Group PLC of Bradford, England.
Hercules had been slimming down in the past few years, selling non-core operations such as its solid-fuel systems and graphite powder businesses. But in 1997, the company was in a growth mode. With over $2 bn in sales and a net income of $325 mn last year, Hercules had metamorphosed from a paper tiger to a flesh-and-blood one under the apt stewardship of CEO Thomas Gossage.
Yet while Gossage brought in $1.5 bn selling non-core businesses and slashed payroll from 15,000 to 6,300 in the 1990s (helping boost the company's stock from $11.25 in 1990 to $66 in 1996 and raising its operating margins to 20 percent, an industry high), he was unable to acquire the key new specialty-chemical businesses he considered critical for continued growth. Plus, Gossage was looking to ease the frustration of two recent failed acquisition attempts. (Hercules was rebuffed by W R Grace in 1996 and by Unilever one year later on bids for two chemical company subsidiaries.) Consequently, Hercules pulled out all the stops for Allied Colloids starting in November 1997.
Working fast due to a UK government code on takeovers and mergers that barred Hercules from acquiring control over Allied Colloids after February 6 1998, the company offered £1.55 per share (US$1.98) in late November for the company, only to be flatly rejected by Allied Colloids. After Ciba entered the picture, a bloody bidding war commenced. The high point saw Hercules flex its muscles and raise its offer twice on the same day (January 20). First it was £1.75 pence per share. Ciba fired back within minutes with an offer of £1.82. Moments before the London financial markets closed, Hercules upped the ante, offering a final bid of £1.95 pence per share - a deal valued at $2.2 bn.
Lucas Hermann, a NatWest Securities analyst in London, spoke for many interested observers when he told the Wall Street Journal later the same day that 'at 195 pence, you start wondering how a company can justify that.'
Ultimately, Hercules' final bid was rejected several days later by Allied Colloids in favor of a slightly higher offer by Ciba. But the aftershocks still reverberated in Hercules' IR department. Gallant experienced firsthand the whiplash effect today's swift M&A collisions can have on a company. The hostile takeover attempt of Allied Colloids had a domino effect at Hercules, with a bidding war going on on one front and a February write-off of costs relating to the bid on another. Analysts grew concerned and punched-in Gallant's phone number on speed dial for the latest news. His learning curve in his brand new position was short.
'All you can do is just try to get in front of events,' says Gallant, speaking of the changing role of IR in the 1990s. 'But change does go with the territory.' Gallant exemplifies a new breed of IR pros who need to think fast as their companies change course on a dime.
In years past, corporate change meant some new brochures from marketing or a few new wrinkles from manufacturing. No more. Nowadays, IR chiefs are more likely to deal with complex divestitures or acquisitions than line edits in the annual report. Technology and global commerce have, of course contributed to the dynamic, ever-changing face of finance. Add increasingly-demanding and better-organized shareholders to the mix and you have a recipe for a more energetic and creative role for the 21st century IR manager.
Taking stock
Take UK-based Tesco, one of Europe's largest grocery store chains. The company is busier than Bill Clinton at a sorority rush, working on new deals at a frantic pace and discarding others in mid-flight.
Since early 1997, Tesco has fired and re-hired NatWest Bank, linked arms with Royal Bank of Scotland on a deal to offer customers on-site personal financial services, revamped its 'pile 'em high and sell 'em cheap' retail philosophy by launching over 2,000 upscale new food products, opened new stores in a host of European countries, including the Czech Republic, Hungary and Slovakia, and opened negotiations to launch stores in Southeast Asia. The company also inked a pact to buy the Ireland operations of Associated British Foods PLC for ú630 mn and jettisoned one of its French retail outposts, run by Catteau, its French consumer goods subsidiary. After all the wheeling and dealing, two facts are unarguable: Tesco is now the number one grocery store in the UK; and investor relations director Jonathan Moore could use a holiday, even if he does beg to differ.
'Oh, it's not as bad as it seems,' says Moore. 'What does add up, though, is the continuous phone calls we receive from analysts and investors asking us to explain our latest move. But I look at it as a challenge. We explain the logic of each move and where we see those moves taking us and how the move will ultimately profit the company. It's a story we need to get out all the time and that's not always easy when so much is happening.'
While new ventures at Tesco invariably result in Moore being called out onto the road to discuss matters with analysts, he will often take the bull by the horn and try to bring top analysts and shareholders into the home office for some specific explanations that aren't always available - or apparent - on road shows. 'We have programs instituted throughout the year to bring people in and take them through our business plan,' he explains. 'When they start asking how much money we can lose or how much you expect to make with a new venture or by getting rid of an old one, you want to make sure you put your best foot forward.'
The Royal Bank of Scotland deal was a questionable demonstration of that philosophy. Last February 14, the Financial Times broke a story that the nine-month campaign between Tesco and NatWest to roll out a new debit card had unravelled. Fearing that the bigger NatWest might cannibalize its own customer base with the deal and eventually bail out, Tesco quickly inked a pact with Royal Bank of Scotland to help manage the store's popular ClubCard Plus interest-bearing debit card that it launched with NatWest last June. RBS will also offer Tesco shoppers expanded personal financial services like credit cards and personal assurance programs.
The new deal with RBS broke a five-year contract with NatWest, whose senior management first heard about the news when an employee saw a press release announcing the deal. 'We got the press release when the press did,' complains a chagrined NatWest senior executive. Ironically, Royal Bank had abandoned talks with Tesco rival Asda over a similar deal just before signing on with Tesco.
'We've been working on programs to provide our customers with personal financial services since last June,' says Moore. 'The only news now is that we're using Royal Bank of Scotland to provide those services (instead of NatWest).' Working deftly with analysts and large shareholders alike, Moore & Co were able to downplay the break-up with NatWest, instead emphasizing the profit potential of working with a smaller, nimbler bank in the potentially lucrative in-store financial services market.
Little impact
All the imbroglio from that deal had little impact on Tesco's stock price, with Merrill Lynch raising its intermediate term recommendation on Tesco's stock only days after the RBS announcement. The stock rose 3.6 percent as a result. One more irony: another heavyweight international securities firm also bucked up Tesco's stock in the days following the deal. Three cheers if you guessed NatWest. Tony MacNeary, a retail analyst with NatWest, told investors that switching from UK grocery titan Sainsbury's into Tesco represented 'better value'. For IR pros like Moore, you can't close the circle more tightly than that.
'We're in a market where the cost of competing grows higher all the time,' he says. 'So there's no question that we get the word out that Tesco is working hard to invest real money into new ventures to keep customers coming into our stores. There's going to be some volatility in that process but we just have to handle it so analysts and investors know what we're doing.'
Hercules' Gallant agrees. 'When you go through a period of divestiture of businesses and then a period of acquisitions, there's certainly a lot for the investor relations department to deal with,' he explains. 'But changing course is part of business. In our case, paring down to a core of jewel businesses and then using that core as a springboard for growth and more change makes good business sense for us. Telling the financial community what you're doing along the way is just part of the program.'