Case One: You run a big conglomerate that isn’t doing as well as it once did, partly because it seems to have lost its touch, partly because conglomerates are out of fashion – again. So you decide to split the group into its constituent parts. After all, that’s what the market likes these days. To your great consternation, however, the market is unconvinced, demands all sorts of as yet unworked-out details, and marks your stock price down.
Case Two: You run a big successful industrial holding company with divisions that can plausibly be grouped into three separate entities. You announce your intention to break it up. The market reacts just as you hoped, unsurprisingly given that break-ups, demergers and spin-offs are flavour of the month just now.
Case Three: You run a diversified acquisitive leisure group. You decide to make a bid for another diversified group. You know the market might not like this, because of its current enthusiasm for focus. But you also know the market likes takeovers almost per se – they liven things up, supply some action – and you think you can probably win it over. In the event, you manage to do so.
Are these varied responses a product of an abstruse financial community that is so inconsistent it’s impossible to second guess its reactions, second only to President Clinton in its flip-flop tendencies? Or is the market taking a cool, analytical approach to every case, unfettered by fashion or emotion?
The answer, no doubt, lies somewhere in between. The market cannot always be right; and, when faced with the choice, it will typically opt for a sure-fire fast buck over long-term industrial logic. But it’s too easy to write it off as so fickle that it will follow fashion regardless of individual circumstances. The market distinguishes between good, bad and indifferent reasons for restructuring companies; and where it sniffs out an attempt to jump on a bandwagon, instead of addressing fundamental concerns, it will make its judgment felt. Markets are pragmatic: in the end, their only consistent preference is for maximisation of shareholder value. If they believe a break-up will do nothing for shareholder wealth, or that a merger will enhance it, that will take precedence over any broad likes or dislikes.
That’s why the best approach to investor relations is to show a preoccupation with shareholder value. And why an IRO working for a management team with different concerns should look for a new job.
