However, a full-time IR professional doesn’t always enter the equation, with CEOs, CFOs and other top executives taking on the task instead. A report on small cap trends from Belgium, Mexico, Vermont – and points in-between
For small cap companies, it’s all too true that nothing succeeds quite like success. Newly public companies are the ones that most need to attract analyst coverage and tell their stories to investors, yet they’re usually the ones least equipped to wage an all-out investor relations campaign. In fact, the typical small cap doesn’t have anyone on staff who’s dedicated to IR full time. Frequently, the IR function is performed by the CFO, who already dons several hats, or by an IR person who shares his or her day with non-IR duties.
‘When you’re a small cap company, it’s not like you’re NestlŽ and people are going to come find you,’ says Trina Hardiman, managing director at Gavin Anderson in New York. ‘They’re not going to read about what you’re doing in the Wall Street Journal.’ Fortunately, some energetic small caps are turning their IR disadvantage into an asset by communicating directly and personally with their shareholders and involving everyone – up to and including the CEO – in promoting investor relations.
Worldwide, ambitious Latin American, European, and Asia Pacific companies are rethinking investor relations, viewing it as one route to the glittering prize of a Nasdaq or Big Board listing and deep-pocketed US investors. That Easdaq, the new pan-European stock exchange, has set stringent reporting requirements for its listed companies puts small caps everywhere on notice that they should beef up their investor relations function to prepare for a heavier reporting load in the future.
Jack of All Trades
Perhaps because attracting attention is such an uphill battle for small caps, some enterprising companies have begun to pin their hopes on the investor relations function. According to Lou Thompson, president and CEO of the National Investor Relations Institute (Niri), half the 65 attendees at a recent Niri conference for small caps were CFOs and the other half had investor relations titles. ‘It’s a significant change,’ says Thompson. ‘In years past, you didn’t have so many people with an investor relations title.’
The IR function may steadily be gaining recognition among small caps, but most CFOs and IR people still say finding enough time for investor relations requires a difficult balancing act, even when IR is in their job titles. Sharon Kaler, manager of finance and IR for Microwave Power Devices, is a case in point. She spends 40-50 percent of her time on investor relations in the $50 mn amplifier and wireless products company, based in Hauppauge, New York.
How do individuals – with or without IR titles – manage to run the function when their days are divided among many competing tasks? At Individual Inc, a $70 mn company that creates personalized news briefings for business executives, senior VP and CFO Bob Lentz is responsible for investor relations but spends 20 percent or less of his time on the function. And Ellen Spooren, VP of corporate communications for Lernout & Hauspie, a $500 mn company headquartered in Ieper, Belgium, and listed on both Nasdaq and Easdaq, says 75 percent of her day is devoted to IR.
Edwin Diaz, VP of finance and CFO for Enamelon, a $147 mn New York toothcare company, estimates that 30 percent of his time is spent on investor relations. He emphasizes that IR is a group effort involving the CEO. Explaining the process by which Enamelon’s products re-mineralize teeth and reverse early stage tooth decay is time consuming and so technical that Diaz sometimes has to enlist help from the vice president of R&D to respond intelligently to shareholder queries.
Unwelcome Change
Not all individuals are pleased when the IR role is foisted upon them. After Microwave Power Devices went public in 1995, ‘Investor relations was new to everyone in the company. No-one had IR training,’ according to Kaler. Being tapped to handle the function was not a welcome change for Kaler. ‘I don’t like my IR role in the company,’ she says. ‘It’s not where I want to see my career going.’
Typically, as capitalizations climb, companies tend to formalize the IR function. For instance, C-Tec, a $1 bn telecom company based in Princeton, New Jersey, hired Valerie Haertel as the company’s first director of IR two and a half years ago. When Haertel came on board, she remembers, ‘The function wasn’t organized at all. Basic things had to be put in place.’ Simply returning shareholder calls represented a huge leap forward. ‘People were very happy that I was calling them back,’ recalls Haertel. ‘They’d say, Oh my goodness. I’m getting a call back from C-Tec.’
When it comes to performing IR effectively, small cap companies have their work cut out. Not only do they tend to leave IR to the CEO, CFO or treasurer, but they may not even fully appreciate the importance of the function.
‘For most Asian companies – particularly newly public ones – investor relations is an emerging concept,’ says Gavin Anderson’s Hardiman. One way for companies to attract American investors is to have a liaison person in the US, she says. The US contact may be someone at a subsidiary or an American investor relations agency. Whichever, Hardiman stresses that overseas companies hoping to win American investors should make quarterly conference calls and complete 10Ks. ‘Some of these activities,’ she says, ‘are new for overseas companies.’
Carrying the Burden
Going public and listing in the US are burdensome for many Latin American companies, which are not required to clear quite so many regulatory hurdles or fulfill so many reporting requirements at home, says Joe Mileti, Latin American VP for Dewe Rogerson in New York. And in Europe, one impetus for change on the reporting front is Easdaq. Easdaq requires companies to issue reports quarterly, and dictates that they reconcile their accounts to US Gaap (Generally Accepted Accounting Principles) or to IAS (International Accounting Standards), according to Siobhan Loftus of Easdaq.
As of July, Easdaq was still quite small, listing only a dozen companies with an average market cap of $180 mn, compared to Nasdaq’s most recent report of 5,536 listings. Of the dozen Easdaq companies, five also trade on Nasdaq, says Loftus. She acknowledges that the time demands and legal and accounting fees for meeting Easdaq’s requirements could scare off prospective companies. Spooren confirms that listing on Easdaq is no mean feat. Of first-time Easdaq listers that lack the Nasdaq training that Lernout & Hauspie had, Spooren says, ‘Wow, are they in for a big surprise.’
In fact, the nuts and bolts of IR don’t differ much for small and large cap companies. ‘The programs that we recommend are not totally dissimilar from what a larger company might use,’ says Craig Parsons. ‘It’s just a smaller scale.’ For instance, all companies need to start with basic materials – an information kit and fact sheets – before targeting interested parties.
Kim Feazel, managing director at Hill & Knowlton in Los Angeles, suggests that small cap companies in search of coverage try approaching regional brokerage houses. ‘Don’t go to all-star analysts at Merrill Lynch who cover the largest companies in an industry,’ advises Feazel. Instead, target highly-regarded firms like Alex Brown or Montgomery Securities that specialize in a given region or niche.
As for the information needs of portfolio managers and analysts in respect of small cap companies, Paul Weisman, portfolio manager at JL Kaplan Associates in Boston, says: ‘What I’d most like to know are what financial targets a company sets for itself, and why, and then an update of how they’re meeting those targets.’ For instance, if a small cap company is striving to grow earnings of 15 percent a year, he asks why that goal was chosen instead of an increase in return on assets as measured by EVA.
David Fondrie, an analyst for Heartland Advisors in Milwaukee, Wisconsin, which invests $2.4 bn in small cap equities, numbers conference calls among his preferred ways of gathering information. ‘Conference calls are very useful but many small cap companies don’t have them,’ he says.
Conference calls can also be a valuable opportunity to set the record straight when rumors arise, contends Enamelon’s Diaz. Enamelon recently held its first conference call in order to confront untrue stories dogging the company. Diaz explains that with such a small float, any piece of news – true or false, significant or trivial – can take a serious toll on stock price.
Although Weisman praises conference calls, he is concerned over being deluged with superfluous information. ‘Some companies think they’re doing the IR job by sending you a fax about every appointment to assistant VP,’ says Weisman. ‘I’d prefer they did less, not more.’
Pursuing Alternatives
Small cap companies need to be creative, asserts Ted Pincus, chairman of the Chicago-based Financial Relations Board (FRB). For companies that simply can’t afford lavish roadshows to spread the word, he strongly advises teleconferencing. Another strategy that FRB regularly advocates is ‘the investment profile,’ a document that resembles a research report completely detailing a company too small to attract much in the way of Wall Street coverage. According to Pincus, the investment profile serves as a prototype for analysts who can then follow up with interviews and base their own reports on this blueprint.
IR Web sites are also increasingly popular, even among small cap companies. In early August, Banca Quadrum (see box p.41) unveiled its Web site, which is dedicated solely to investor relations. On it, says Ernesto Rodriguez, VP and manager of IR, are press releases, a copy of their Form 20-F (the form foreign companies file with the SEC to list on Nasdaq), annual reports, any recent presentations, the latest proxy statements, and a mechanism for e-mailing Rodriguez directly.
According to Dewe Rogerson’s Mileti, the Web site is a valuable tool that small caps should carefully consider, if for no other reason than ‘to ensure there’s accurate information available on the Internet.’ When conducting online research on Banca Quadrum, Mileti was surprised to find how much misinformation existed in cyberspace. He suspects that information gaps are particularly common for foreign and other little known companies.
Small caps that are unable to afford a high-priced investor relations officer can professionalize the investor relations function by hiring a coordinator, recommends FRB’s Pincus. He points out that the coordinator can control the flow of information to the media and the Street, and can help managers make the most of trips by setting up meetings with local investors. ‘Rather than going on expensive roadshows, small cap companies can have their investor relations needs piggyback on their other business,’ says Pincus.
Good Relations
Unfortunately, coordinators and even investor relations executives may turn off the very institutions they hope to attract. Weisman, whose small cap portfolio is worth roughly $175 mn, says he’d rather talk to the CFO than an investor relations specialist. ‘In smaller companies, the investor relations person is usually less help than the CFO,’ he says. ‘In large caps, that isn’t so. There the CFO has too much on his plate to do investor relations too.’
For institutions yearning for direct CFO contact, the news is good. Niri’s Thompson emphasizes that ‘CFOs are still spending a significant amount of time on investor relations. CFOs like this function. They like the visibility of this position. They like talking to the Street.’
However, the potential downside for a small cap whose CFO is in charge of investor relations is clear: frustrated portfolio managers and analysts. Weisman recalls that in the mid-1980s, ‘most small cap companies didn’t have any investor relations people.’ If you reached the CFO, ‘he was usually so thrilled that he’d talk your ear right off,’ says Weisman. ‘But if the CFO was very busy, there was no-one to talk to at all.’
For small cap companies, the tensions and trade-offs of investor relations are particularly apparent. When officers have the time and the inclination to communicate directly with shareholders, the result can be a special chemistry and an intimate bond. ‘Stock picking is a little bit of an art. It’s a little like a date or a job interview. There’s no science,’ concludes Weisman. ‘The more you get to know the company and its management, the more of a feeling you get.’
Banking on US Investors
Learning to deal with the blunt, sometimes confrontational style of US investors was one of the earliest challenges faced by Ernesto Rodriguez, who is responsible for IR at Banca Quadrum in Mexico City.
‘US investors say, I don’t believe you because Mexican tax accounting is so lax. They say, You must be lying. In Mexico you would never say that,’ maintains Rodriguez. It didn’t take long for him to become inured to Americans’ bluster: ‘US investors can be a bit rude with you. After a while, you get used to a straightforward way of doing business and you don’t take it personally.’
Banca Quadrum has been listed on Nasdaq since July 1993, and the vast majority of its 2,000 shareholders are in the US. Like other Mexican banks, the company’s market cap plummeted during the Mexican peso crisis in 1994. Banca Quadrum once had a $200 mn market cap; today, it’s more like $30 mn.
Though recent years have been rocky for investors, the bank has no one working on investor relations full-time. Rodriguez’s title is vice president, manager of IR, but he spends only 50-60 percent of his time on investor-related tasks. The remainder is spent with the budget secretary and assisting lawyers.
Nevertheless, Banca Quadrum stands out among its Latin American small cap peers for employing someone with an IR title, says Joe Mileti of Dewe Rogerson in New York. Mileti points out that in Latin America, companies ‘usually do not have a dedicated investor relations person. They don’t have the resources.’ And life without a dedicated IR person is no picnic, especially where international investors are concerned. ‘The needs of international investors are much more demanding than a local market is used to,’ says Mileti.
Being listed on Nasdaq as a foreign company means filing Form 20-F with the SEC each year. Banca Quadrum also voluntarily reports quarterly earnings using US Gaap rather than the less rigorous accounting practices that are common in Mexico. ‘We think that in the long run, the market will have a better perception of us for using Gaap,’ says Rodriguez.
Learning to deal with rudeness isn’t the only hurdle Rodriguez cleared when he began courting US investors; he also had to master English. ‘It’s a requirement of an investor relations person to speak English,’ says Rodriguez. And although communicating with the US may have its share of headaches, it’s still worthwhile.
Rodriguez works closely with the New York office of Dewe Rogerson, which fields shareholder calls, sends out information kits, and provides the company with strategic counsel. ‘It’s very important to have an international investor relations firm if you’re a small company without a New York office,’ maintains Rodriguez. ‘Dewe Rogerson is like our home-base in the US.’
Gaining analyst coverage is a large concern for Banca Quadrum, says Rodriguez. Even a temporary change in personnel at the large research houses can hit a small cap company hard. Rodriguez laments that an analyst at Bear Stearns who covered Banca Quadrum recently left, and Bear Stearns has yet to hire a new analyst to cover Latin American banks. With such limited coverage, ‘there’s not enough information for the investment community to make decisions about your company,’ says Rodriguez. He believes that the company’s market cap will have to increase several fold before it can expect substantial attention from Wall Street.
Bear Lovers Make Good Shareholders
Tim George’s title at The Vermont Teddy Bear Company stands out even in the relatively relaxed world of small caps – he’s director of finance and bearholder relations. Whimsical title notwithstanding, George’s list of responsibilities is anything but fun and games. He says that he spends approximately 25 percent of his time talking with shareholders and performing other IR-related tasks. His other, non-IR responsibilities include budgeting, monitoring cashflows, issuing financial projections, and benchmarking the company’s progress.
Even straightforward tasks like responding to shareholder calls can be a challenge at tiny small cap companies like this one, which manufactures premium quality teddy bears and has a market cap of just $7 mn. Last August, the Shelburne, Vermont-based company created a dedicated investor relations phone line, where shareholders can leave messages. Having very little back up, George continues to check voice mail and return investors’ calls even when he’s away on vacation.
Being small, explains George, ‘you can’t do as much in terms of investor relations. But the flip side is that it’s a lot more personal. For example, every e-mail I send back is original; I don’t have a standard block of text.’ In an average week, George receives one letter in the mail, two e-mails, and five telephone calls. ‘When I call shareholders back,’ he says, ‘I can spend 15 minutes talking to each of them.’
The questions George most often fields focus on the company’s financial performance and why the stock price has fallen since the company’s 1993 IPO. (George attributes recent earnings problems to having opened retail stores, which are rarely profitable from the outset, and to having tripled the size of the company’s catalog without gaining expected sales.) Other shareholders call in with suggestions, such as marketing old and young Elvis bears, or selling teddy bears at airports. Of the company’s 1,400 stockholders, one-third own 100 shares or less and many also own the company’s cuddly wares. ‘We’re glad to have people who love teddy bears as our shareholders because they like the company for what it is,’ says George. ‘They’re not here to make $3 per share fast.’
The company has no outside IR agency (‘We can’t afford it’), and no Wall Street coverage (‘I don’t know what would be big enough to initiate coverage, but $7 mn market cap isn’t’). On the other hand, The Vermont Teddy Bear Company has distinguished itself with its sophisticated Web site – up and running for more than a year – boasting a wealth of IR information (www.vtbear.com). ‘From the IR side, I take a lot of pride in our Web site,’ says George. He posts quarterly reports and 10Ks on the site, and has also pioneered ‘IR Wire,’ a service for sending interested parties full-text press releases via e-mail at the same time as the releases are sent to the newswire services. A recent count had 102 people regularly receiving e-mail press releases from The Vermont Teddy Bear Company. The releases ‘serve as a reminder that they’re an investor in the company,’ says George. ‘It makes them feel like they’re special, which is a good thing for a shareholder.’
Clear as Glass
Mulia Industrindo has tapped the global capital market with precision and efficiency to build one of Indonesia’s foremost industrial groups. Since its IPO in January 1994, the ceramic and glass manufacturer has raised over $300 mn in equity and more than $400 mn in debt. Widely held by international investors, Mulia Industrindo is now a regular fixture on the global roadshow circuit and the senior financial team leads the way in communicating with investors. Good IR has helped it grow from its small cap roots.
Mulia Industrindo has been received with open arms by foreign investors. Those fortunate enough to have subscribed to the $40 mn IPO have witnessed the total return on Mulia Industrindo stock reach a height of 275 percent over the last three years. During that period, two rights issues worth $270 mn allowed investors a chance to participate in growth. Promoting the company through the international trade press, roadshows and a selection of brochures, annual reports and periodicals, Mulia Industrindo strives to reach its investors in as many ways as possible – despite the time burdens telling that story puts upon the group’s senior executives.
‘We are very much driven by performance, and the rise in the stock is based on tremendous growth across the board in terms of revenues and profits,’ says Tony Surjanto, finance managing director of PT Mulia Industrindo and a strong believer in the IR component. ‘Mulia Industrindo offers investors a play on the rapidly expanding economy and the export potential of a company that has become one of the most promising growth stories in Asia.’
Surjanto and his colleagues concentrate on key messages for their IR approach. Growth is central to that story. Since Mulia Group’s launch in 1972 by the brothers Eka and Joko Tjandranegara, and its 1994 listing on the Jakarta and Surabaya Stock Exchanges, the expansion has been relentless. Growth in the equity base, along with impressive retained earnings, have pushed Industrindo’s capitalization to almost $900 mn.
Another IR hot point is Mulia’s advantages over Asian rivals. They include an abundant supply of raw materials and energy needed to produce ceramic tiles and float glass as well as a ready supply of timber for packaging. ‘More importantly, we are an independent supplier,’ says Hendra Heryadi, marketing managing director of Mulia Industrindo. ‘By avoiding the joint venture route we pay no royalty fees and are unrestrained in our expansion. Our low cost of production and the ability to expand where we want is our advantage. There is little doubt that our growth in international markets is part of the story international investors buy into.’
In terms of expansion, Surjanto intends to rely on retained earnings from 1998 onwards. After Mulia Industrindo’s second rights offering, management stated that there would be no new rights offerings in the near term as the level of retained earnings is sufficient for growth.
With foreign investors vital to the ongoing success of Mulia Industrindo, and the need to cultivate the domestic investor base, Surjanto sees IR as a critical tool for the company’s future.
David Lake & Julie Kozma
Xeikon: No IRO and Happy
Xeikon’s CFO Marc Blanpain is glad that he handles the investor relations function. Operating without a dedicated IR person is an advantage, maintains Blanpain, who shares responsibility for investor relations with Alfons Buts, the company’s recently-appointed CEO. ‘I could not see someone other than the CEO or myself doing this job,’ says Blanpain. ‘We know each other very well. We give the same information to the outside and no-one gets different information.’ This way, he says, ‘the analysts – they’re very good at this – are unable to play one of us off against the other.’
When Xeikon, which is based in Mortsel, Belgium, and which has a digital color printing system, went public last March, the $337 mn company chose to list exclusively on Nasdaq. ‘The US is a key market for our products,’ explains Blanpain. Although most original investors were European, Blanpain says that the majority of new shareholders since the IPO have been American. So for him, talking to American investors constitutes a large part of the IR role. The company uses the New York office of Gavin Anderson & Co for advice on which investors to target in the US.
In addition, Buts travels regularly to the US, and the company holds quarterly conference calls with American investors. Bridging time differences takes accommodation from all sides. ‘We organize it in such a way that US analysts start the day very early and the European analysts go to bed a little late,’ says Blanpain. He believes that the single greatest communications obstacle comes from regulatory constraints, not language or cultural barriers. Conveying meaningful information is difficult because company officers are ‘not able to say anything, but have to say something,’ says Blanpain. ‘That’s part of life.’
The learning curve is steep for a newly public company like Xeikon. Blanpain points out that when it produces its second annual report, the company will do some things differently to avoid duplicating efforts. For instance, Blanpain now knows not to translate the report into American English before executives have signed off on final content.
Among the larger, strategic challenges is conveying information to different types of investors. ‘We need to tell the little guys, the Mr Smiths, that some days are good, some are not so good.’ Large investors have different information needs. ‘You don’t address large funds in the same way you talk to the guy who’s going to buy 300 shares. And they’re both important to us,’ concludes Blanpain.
