Palo Alto provides the setting for high-level discussion about equity analyst coverage, targeting the buy side, earnings guidance and activist investors
On March 2, IR magazine hosted its first West Coast Think Tank for 40 senior investor relations officers. Off the record and off the cuff, the discussion flowed across four general areas. Here, we present some comments from the session.
Managing equity analyst coverage
Sponsored by Nasdaq
‘Once you’re hot, you’re hot, and everybody flocks to you. But they don’t necessarily do any research. They just need to put out a note on your hot stock. It becomes very difficult to deal with all these people who really aren’t following you but are always issuing notes based on nothing. You can be stuck with 15 or 20 other people who really aren’t doing any homework.Â
‘We went from seven analysts to zero, but there’s residual knowledge among our board members. They remember when they were covered by the Citigroups and the Bear Stearns of the world, so to go to a paid-for model of research is very problematic. They have no problem cutting checks, but they don’t think paid-for research is seen as objective. Still, we would definitely consider paying for quality research.Â
‘We have 20,000 employees, so there’s no way I can know who’s calling who. However, as part of our FD policy, I partner with our legal group to train people on fair disclosure. And if we ever run into a problem, at least we can show that we do everything we can as a company to train people.Â
‘Every analyst day we grapple with the fact that after the presentations, analysts want to meet other executives besides the CEO and the CFO. So I’ve trained about eight people – some with an IR background, some with a legal background – and I pair them up with all the executives. If they feel an executive has made an inappropriate disclosure, they’ll come right to me or our senior counsel.’
Targeting the buy side
Sponsored by Bank of America
‘I’ve been on a fair number of non-deal roadshows and one of my frustrations is not getting to see portfolio managers as well as buy-side analysts. To be as productive as possible, we would like to meet with the decision-makers as well as the industry experts.Â
‘Our company is covered by about 30 or 40 sell-side analysts, so we try to spread our roadshows among them. But we also assess the quality of the meetings and how smoothly the process goes. If someone screws up, they go to the bottom of the list next year.Â
‘Whenever we can, we try to avoid the 20-minute spiel. We like to walk in and say, It’s your meeting. If you know the story, just ask us questions and we’ll update. That’s our dream meeting – so we don’t have to go through the same speeches 40 times a day.Â
‘Feedback is really important in order to understand what the follow-up questions or impressions are. In IR we’re sometimes married to the story and think what we say sounds beautiful, but maybe it didn’t resonate in the meeting. Maybe the fund manager will tell the analyst that some things didn’t quite jell, and that feedback makes us all better. But it’s something I’m missing from a lot of my sell-siders.Â
‘Anonymous feedback is fine, particularly when you’re taking new management on the road. The CEO and the CFO know when they’re on or off, but when you take a broader spectrum of management, it really helps to get that feedback.’
Earnings guidance
Sponsored by Market Wire
‘We have a standard disclosure policy with a section about how and when we communicate with analysts, laying out exactly when our quiet periods are. We also say that the IRO will always be involved in meetings, so when I travel and can’t be in the office with management, the policy puts at bay investors who have to speak to management right away. If I’m not available, they can’t do it. In terms of guidance, our policy is that we will give guidance on the quarterly call and we do not take any responsibility for updating it at other times.Â
‘We just went from doing only quarterly to doing both quarterly and fiscal year guidance. All our sell-side analysts didn’t want us to do it, but it ended up being the best thing for our stock. The reason is that no one out there had the expectations of our company for the year that our management team did. So having that out there raised the bar and got a lot of people excited about the stock.Â
‘There’s a good academic paper by some professors at the University of Washington. They analyzed the guidance practices of 50 or 60 companies and concluded that it’s advantageous to give guidance for various reasons. Another conclusion was that one of the reasons you should give guidance is that if you stop, the Street will interpret it as a sign that your business is decelerating. So you’ll get a sell-off just on the change in guidance policy.’
Facing off with activist investors
Sponsored by the Financial Times
‘In my opinion, it’s all about value, not corporate governance. Activist investors are there to make money, not to make friends. But as long as your board and your management stay open to structural change and creating value, I don’t think it’s that difficult. It’s just that in investor relations, you’re used to having warm and fuzzy relationships. In some cases I’ve found it a little taxing to deal correctly with hedge funds.Â
‘Earlier this week the Lex column in the Financial Times said, Shareholder activism is coming to the Valley. To quote a couple of lines: Silicon Valley looks like a juicy target ... Private equity investors can see value in the valley; activists might not be far behind. We haven’t yet seen the activists arrive in force, but the cash on some of the balance sheets here is starting to build up, and in a lot of cases you still don’t quite hear the dedication to shareholder value that you’d expect from public companies.Â
‘I’ve yet to see some of these hedge funds sell out or leave a company alone if the company immediately says, Yeah, we’ll declassify our board and we’ll redeem our poison pill. There are other issues on the table there, not just corporate governance. Today’s corporate governance activism is very similar to the old hostile raiders of the 1980s. There are companies that have a lot of cash, that don’t have a lot of debt on their books, and that do have some undervalued and underperforming assets, and they have been inundated with hedge funds.’