All about the buy side
A hedge fund with huge clout, a global investment manager with a foot in Europe, a sell-side analyst who knows everyone in Silicon Valley, a perception study ace, a third-party expert on how investors use the sell side: these are just a few of the experts who were part of IR Magazine’s North American think tanks in September and October, when senior IROs gathered for group discussions in Palo Alto, New York and Toronto.
When it comes to the equity investment process, the US, unlike Europe (more on which below), is generally sticking to the status quo, though some incremental changes were noted. For instance, larger companies are increasingly reaching out directly to investors, which can be frustrating for sell-side analysts covering them. At the same time, some large institutional investors are building their own corporate access teams to complement what they already get from the sell side. ‘We have started to streamline the process so we can make more bespoke trips and make better 30 use of our time and company management’s,’ said one buy-sider.
Palo Alto’s IROs were aghast that some companies won’t meet with hedge funds. ‘That’s short-sighted in today’s interconnected investment world,’ said one. ‘Hedge funds have some of the smartest people asking the toughest questions, and they talk a lot to each other. You always learn something by meeting with them.’
The UK’s crackdown on corporate access and Europe’s plodding MiFID II regulation, which could unbundle research payments, are but distant rumbles in the US, though North American IR professionals do wonder whether their overseas roadshows will be affected, and whether global fund managers may start to hew to European rules even here. ‘We believe that changes in Europe are going to spill over globally and potentially have a significant impact on the sell side, and consequently on research coverage and how you get your message out,’ noted a professional sell-side watcher. And one fund manager remarked: ‘Hopefully it doesn’t become so draconian in the US.’
According to European IROs at the think tanks, the UK hasn’t seen any reduction in meetings between companies and investors because of the Financial Conduct Authority’s clampdown on corporate access; if anything, demand is stronger. In fact, while commissions paid for corporate access went from 20 percent of buy-side allocations to 4 percent in two years, payments for ‘analyst service’ went up by around the same amount. ‘The unintended consequence of the regulation was that corporate access has gone from the visible economy to the underground economy,’ noted one think tank attendee.
The bigger concern is Europe-wide MiFID II, with the sell side worried about reduced research payments, companies worried about reduced coverage, especially of small caps, and ‘enormous fear on the buy side about the administrative hassles’. Worries aside, the new regulation is on course to be enacted in 2017: ‘We’re potentially going to see a mad scramble as institutions and the sell side adjust to a set of regulations in a short time span.’
| Three steps to be ready for the inevitable
Today’s strong US market, particularly for technology companies, can feel like walking the high wire, buffeted but not toppled by China’s slowdown, a charging dollar and Fed uncertainty. ‘A downturn is going to happen, but nobody knows when,’ said Stephanie Wakefield in Palo Alto, fresh from wrapping up more than a decade leading investor relations for Informatica, which this year was taken private for $5.3 bn.
East Coast Extra East Coast IR professionals got their own primer on troubled times with bearish presentiment going into the third quarter earnings season. ‘Investors are acutely focused on your business drivers and outlook. Your management teams have insight into the end markets. So providing insights and color without necessarily giving guidance is critical, and it’s what differentiates good from great management teams,’ said one panelist. |
As president-elect of NIRI Silicon Valley, Wakefield gave the think tank attendees the following advice to help get ready for when the tipping point comes:A CEO’s tale: How she came to value IR
When we ask IR professionals about challenges and goals, a common answer is to increase the importance of IR with senior management.
We tackled this challenge head-on in Palo Alto with the CEO and IRO from a company where IR is demonstrably valued. ‘Ruth is a trusted part of our senior leadership team,’ began Lisa Su, president and CEO of Advanced Micro Devices (AMD),describing Ruth Cotter, vice president of communications and IR. ‘Sometimes people think of IR as a communications function. But for us it’s a strategic one.’
When Su joined AMD in 2012 as general manager of global business units, she gave scant thought to how operational decisions would affect outside perception. That switched when she was appointed as CEO in October 2014. ‘As CEO I realized what mattered was not this quarter or this year, but what we want to do over the next three to five years, and what type of investor we need to attract. Ruth, with 14 years of history at the company, helped with that perspective,’ she explained.
When asked whether Su influenced investor relations, Cotter said she broughtan understanding of ‘grayness’, telling the team, ‘You’re so black and white. In business, there’s a lot of gray, a lot of trade-offs you have to make.’ As a mentor, Su has also encouraged Cotter and others at AMD to ‘executize’: to behave like a C-level executive, both when presenting the company to investors and when engaging with management and the board.
AMD’s annual perception studies get shared broadly throughout the company, not just with senior management and the board. Business units are told if investors are unsure about a certain product, or marketing finds out a message isn’t being understood by Wall Street. ‘There’s two-way communication going on inside the company as well as outside,’ Cotter said.
Briefing on multimedia & mobile
In sessions at the Toronto and Palo Alto think tanks, attendees enjoyed a show-and-tell briefing about search engine optimization (SEO), data visualization and mobile websites.
Google makes hundreds of changes to its search algorithm every year but some specific changes in the last few yearsare particularly important, including one that pushes engaging, fresh and authentic content – meaning multimedia, infographics and photos – up the rankings, and another focused on local results.
The most recent big update, from April 2015, was dubbed ‘Mobilegeddon’ because it prioritized ‘responsive’ websites that resize automatically on a computer, tablet or phone. This makes the five keys to great SEO a low bounce rate, freshness, engaging content, multimedia and mobile.
Besides getting you higher search results, visual information is more likely to be shared on Twitter, Facebook and other social networks – and visual information simply tells a story better. According to Forbes Insight, 59 percent of senior executives would rather watch a video than read text. ‘Don’t think of the algorithm changes just in terms of your SEO ranking,’ said one panelist. ‘Think of it as a huge sampling of user behavior online. If Google values mobile and other things, it’s because that’s what the audience wants.’
One IR professional in attendance pointed out that it’s not just senior executives doing IR-related videos. At least one analyst, BMO Capital Markets’ Tom MacKinnon, Canada’s insurance axe, has begun doing videos, too – perhaps a sign of things to come.
Online annual meetings coming to Canada?
Virtual shareholder meetings (VSMs) have been growing slowly but steadily in the US, going from four in 2009 to 117 in the first three quarters of 2015, including HP, by far the largest firm to do a virtual-only meeting. They’ve yet to be tried in Canada.
A VSM is more than a webcast annual meeting: it complies with corporation law by identifying and authenticating shareholders, and allowing them to participate in the meeting by voting their shares and asking questions. So what’s stopping them in Canada? There are some legal concerns because meetings in Canada need to allow for new matters to be raised, including director nominations, which could be awkward in a virtual-only meeting. But national and provincial corporation laws were amended within the last 15 years with electronic meetings in mind, and the technology used in the US could be tweaked for Canada. Company articles and bylaws may also need updates, but neither courts nor regulators are inclined to stand in the way of using technology.
| DIY resources to make infographics
piktochart.com knowledgevision.com fusioncharts.com public.tableau.com infogr.am easel.ly Source: Marketwired |
IROs at the think tank in Toronto applauded anything that would reduce the hassle and expense of annual meetings. A few wished they could be done away with altogether. As explained by an IRO who had done VSMs in the US, they saved the company a lot of money while giving it control over what had been a contentious event in previous years. It also saved time for management and directors. ‘The key factor was that shareholder rights were not impinged. It was a win-win,’ she said.
‘From a board perspective, it’s great,’ added a third-party expert. ‘The company has better control over the process. Plus it can get the message out to a broader group, including the retail shareholder base; and retail investors – when they vote – are the most supportive of management.’
The options option
The options market, though little understood and a lot feared, has always loomed in the background for IROs, especially those who keep a close eye on how their stocks trade. But in the last 10 years it has gained massive momentum, to the point where around 1.8 mn options trade a day, translating to about 2 bn shares of common stock.
All kinds of investors trade options but shareholder activists are particularly fond of them because of the leverage they provide and the opportunity they afford to build a large stake under the radar.
Beyond activist threats, options can open a window on broader investor sentiment before it shows up in regular stock trading. ‘Though options are a derivative of yourcommon stock, there are many inputs into their pricing model, such as your future dividend stream and future volatility,’ explained a veteran options trader recently arrived in the IR arena. ‘You can glean from options pricing what your investors expect from your stock and your company.’
By studying the pricing of single stock options compared with options pricing for competitors and whole sectors, surveillance analysts can start to build a picture of sentiment and expectations ahead of specific corporate events such as earnings announcements.
‘It is not a perfect predictor,’ admitted the options expert. ‘It’s like a weatherman. He might say a hurricane is brewing. Do you assume your house will be blown down? No, but you make preparations. You go buy some water and board up your windows. That’s what options can tell you: when there’s a storm developing that could turn into a hurricane.’
Activist simulations
This year, in both Palo Alto and New York, IROs got to go through hypothetical activist situations with advice from a trio of advisers: a communications consultant, a proxy solicitor and outside counsel. Here are some highlights.
Phase 1: Initial response
The IRO’s response: ‘I immediately notified the same core group you huddle with in a crisis: CEO, CFO, chief legal officer and head of communications. I gave them the heads-up that a hedge fund was sniffing around, what kind of questions it was asking, and what its angle might be. First I had a conversation with the activist, then our CFO did, and ultimately our CEO. I had to make sure they were both extra-sharp on message, realizing that anything they said could be used against them. We already had a proxy solicitor and a consultant on retainer, which was a good idea. You don’t want to have to start looking for them if things get ugly fast.’
Should the board be informed? ‘Escalating it beyond management is not the IRO’s job, but you can advocate for it. CEOs often think they’re performing just fine and their shareholders love them, but IROs often know very differently. Part of your job is to make sure your general counsel and the board understand if there is investor frustration.’
Phase 2: CEO engagement
First encounters: ‘There is, at the right time, a real advantage to meeting with the activist. The next call could well be the most important communication that will take place throughout the entire engagement: it will set the tone and set expectations. View it as fact-finding, trying to understand what the activist really wants – but make sure you go in assuming that whatever is said to the activist will come back to you in a letter that will also be released to the Wall Street Journal. Initially, listen-only mode is good.’
Show willing: ‘Consider the benefit of having a good track record of engagement. If you do end up in a proxy fight, you could well be judged on whether or not you agreed to a meeting.’
Phase 3: Board engagement
Should the chairman or independent lead director meet with the activist? ‘Proxy contests have a couple of windows for settlement. This is the first one: before the activist goes public. Once the activist goes public, the wolf pack is going to come in and start buying behind it, and it will have people to answer to. But for now, before it goes public, it’s a low-cost settlement for the activist.’
Phase 4: Public disclosure
Good karma: ‘This is the time to leverage those relationships you’ve been building with the governance professionals at BlackRock, Vanguard and State Street. Those would be tough calls if you’d never spoken to any of them before.’ Maybe time to settle: ‘In many instances directors have come onto boards in settlement, and it hasn’t been a bad thing for the companies concerned. Sometimes the board has been an impediment so management brings in an activist to kick the board in the behind.’
Phase 5: Proxy fight
Or not. ‘It’s all about leverage. People usually know whether they’re going to win or lose, and it’s only when both sides think they have a shot that they actually fight. That’s why these votes are so close, like at DuPont, the largest fight in the history of proxy fights, when no one knew who was going to win until a couple of days before.’
