When small-cap IR goes big

The average small-cap IR department operates on lean resources: tight budgets, few people and little time. Getting things right is often a balancing act, but some have developed methods to take their small-cap IR up a notch.

Use outside and inside help

One small-cap firm that is clearly doing something right when it comes to investor relations – without actually having an IRO – is US Ecology. The $987.4 mn market cap firm, which specializes in complex waste management such as the treatment, disposal and recycling of hazardous and radioactive waste, was nominated for three awards at the IR Magazine Awards – US 2015.

The company was short-listed for the grand prix for best overall investor relations (small cap), while Jeff Feeler, CEO at the Idaho-headquartered firm, was runner-up for best IR by a CEO, and Eric Gerratt was nominated for best IR by a CFO.

Such nods are a clear indication of the effort that’s put into IR by senior management at US Ecology. ‘We try not to be overly optimistic or overly pessimistic – we just try to be really transparent. Along with that, I think we’re very responsive,’ says Gerratt. The company’s first port of call for IR queries, however, is Alison Ziegler, a consultant with Cameron Associates. ‘Then I get involved pretty quickly as we move through the questions from a potential investor before it dovetails up to our CEO,’ explains Gerratt.

In fact, Ziegler says she’s been with the company longer than Gerratt and, prior to Feeler joining – originally as CFO – and then engaging Cameron Associates and Ziegler, the company ‘really didn’t do investor relations at all’.

It’s not only outsourcing that can help bolster a smaller IR department. At €499.2 mn ($549.7 mn) German tech firm AIXTRON, IR and corporate communications director Guido Pickert is helped by Andrea Su, who takes care of IR in the US (where the company is also listed on NASDAQ), and by other departments within the company.

Pickert brings in inside help for some of the more complex tasks falling under the IR department’s remit, such as the annual report. ‘First of all, it’s very legal-driven – you have to include certain content in your reports,’ he says. ‘Then you have to discuss the content of the report with management, and of course it has to be correct, so the interaction with the finance department is very close. The communications department [is also involved] – it does a lot of quality control.’

The same applies to the AGM, a legally very tight event in Germany. ‘Here, a lot more departments contribute,’ Pickert explains. ‘With other teams working with us, we can organize events that are fairly big, even with a small team.’

Maximize senior management time

Pickert echoes Gerratt and Ziegler’s sentiment regarding resources, which means not just time and money but also human resources. ‘It’s definitely a challenging balance,’ he acknowledges. ‘There are methods to increase efficiency, but they require upfront investment, so you have a conflict there. Then there are other methods you could implement alone, but they take time and you have to balance that against the increasing obligations you have.’

There’s also the issue of senior management time – and as joint CEO and CFO at AIXTRON, Martin Goetzeler’s time is even more in demand. ‘Naturally, he has less time for IR,’ says Pickert, who does at least manage to make sure Goetzeler is available for quarterly roadshows and conferences. ‘We also take advantage of business trips to our subsidiaries and organize meetings around these visits.’

Douglas Fox was head of IR for 17 years at US tech company Zebra, which actually grew out of being a small cap around 2011. He says that during his tenure at the company the budget was ‘fairly constrained and static from year to year’, and that he had to use C-suite time wisely.

But he notes that it’s not just the CEO and CFO who can get involved in IR: you can pull in other senior executives, too. ‘While they are not as active in IR as the CEO or CFO, investors appreciate meeting other executives – including the senior vice president, who runs engineering and the supply chain, and the senior vice president for sales and marketing – because they can give an additional perspective on the company.’

Boost your coverage

Despite US Ecology receiving a raft of nominations for top IR Magazine Awards in 2015, Gerratt isn’t resting on his laurels, and he is keen to work on ways to improve the IR program. These include dedicating more time to IR and getting out on more non-deal roadshows.

Another issue the firm faces – and a common complaint among small caps – is gaining analyst coverage. A big acquisition for the company in June 2014, followed by a secondary listing in December, means US Ecology now attracts more attention and has picked up more coverage, says Gerratt. ‘But we still have pretty light analyst coverage compared with larger-cap companies, and that creates some challenges. As a result, there’s just not the familiarity with our story among new investors.’

Ziegler recommends that in addition to considering the paid-for research model – which obviously eats into the budget – very small companies struggling with coverage should consider writing their own ‘pseudo research and reports’.

‘If you can kind of hand [investors] a lot of the information and do some of the work for them, it increases the likelihood of getting coverage,’ she says. ‘It’s an easier sell and it lets you pitch appropriately.’ This was an approach she used in her early days with US Ecology. ‘I put together some pitch pieces I could send to investors that they could read through pretty quickly,’ she recalls.

Gerratt adds that small caps should ‘really take advantage’ of other opportunities when raising equity, for example. ‘Using that as an opportunity and leveraging that, not just to get out on the road and get exposure but to get additional coverage, is a good way to get analysts or firms to start covering you that might not otherwise do so,’ he says. He explains that in some cases it’s ‘almost a given’ that if an institution works on an equity deal for a company, it will initiate coverage, and you can then work with those analysts to establish a relationship and build credibility. ‘That’s a key component,’ Gerratt notes.

Make the most of brokers

Much has been made of the potentially negative impact corporate access and research regulation changes could have in Europe, especially on smaller companies that tend to lean more heavily on brokers. Despite possible conflicts of interest, Pickert reckons he gets a good balance.

‘I really rely on the know-how and the resources brokers have, especially when I go on roadshows,’ he explains. ‘I could probably organize it more specifically and tailor it to our needs, but then I would have to do it on my own or with a team. As it is, I team up with the broker and leave it its fair share of time to also accommodate its important customers. If we get a good balance, where the broker’s top clients are there and so are my top investors, we both get something out of it.’

Even at Zebra, which now has a market cap of $5.72 bn and has allocated more resources to the IR department since completing a $3.45 bn acquisition of Motorola Solutions’ Enterprise in October 2014, Fox says brokers played an important role. With Zebra’s historically static IR budget, and analyst coverage that has ‘waxed and waned over the years’, Fox says he ‘tended to work with the brokerage firms that supported us in terms of coverage. I thought it was an important way to say thank you to them for their work on Zebra.’

Fox advises companies to engage in an ‘early and open dialogue’ with brokers when it comes to travel itineraries. In fact, investor relations travel at Zebra has grown somewhat since the Motorola deal. The reason? ‘It’s been important to communicate the benefits of the acquisition to investors and explain how it will create value over the long term,’ explains Fox. ‘We felt that there were specific investors we wanted to meet with and that it would be more effective for us to do those trips on our own. Nevertheless, brokerage firms were still important for our non-deal roadshows.’

Balance, Fox says, is key to making this work. Overall, smaller-cap firms will always have to work harder to provide excellent IR service with their tighter budgets, but there are plenty of examples of companies that really do manage to do more with less – albeit by making good use of their friends and colleagues. And the really successful ones could even have a lesson or two to teach their larger-cap corporate brethren.

Source: IR Magazine Research Report: IR challenges, 2015. Click for a larger image 

 
This article appeared in the fall 2015 print issue of IR Magazine