The telecommunications industry is experiencing one of its most dynamic periods, as technological advances and consolidation worldwide have made the sector into a preferred choice for investors. But as companies around the world compete for consolidation of wireless, internet and data services, the job of the IRO has become both exciting and treacherous.
From Chile to New York the consensus is that transparency and accurate reporting remain strong and true around the sector. At the same time IR departments across the globe are tackling the job in different ways, depending on the country where they operate, or the size of the company they represent. The range of functions differs widely from those used by, say, Latin American telecoms, which are still new to IR work since many recently emerged from state monopolies; to the all inclusive role played by IROs in giant companies such as AT&T. Then there are the IROs at emerging telecoms companies such as Qwest or Frontier, where they have to patiently explain in plain English the complicated technical edges that make them stand out.
For Connie Weaver at AT&T, the IR job is fully integrated. ‘We are a large company which is fully visible, and everything we do is magnified. As a result we have to be clear and open,’ she says. Because of AT&T’s large shareholder base, Weaver and the 14 other IR staff also become active players in the company’s sales strategy. ‘My investors have to trust me. I cannot just be a mouthpiece for the corporation; I have to understand our management operations, and I have to be a player at the table when we meet with the investors,’ she adds. ‘You have to be able to handle the sophisticated analyst who follows your industry, but also the individual investors who make up 50 percent of our investment sector – like my mother,’ she quips.
Way over at the other side of the spectrum are the emerging telcos, which are also a hot commodity for investors and pose other challenges for IROs. ‘The best IROs in this industry are those who have done a good job of explaining their operations and controlling expectations,’ says JP Morgan telecoms analyst David Barden. These companies are not AT&T, says Barden, but they have $1-30 bn in market capitalization, and they are very popular in a very fickle investment community. ‘A lot of these companies are very young, and the IROs have to explain why they’re different, to people who don’t understand their complicated technologies,’ Barden adds. The stock market can be volatile in this sector, and carefully managing expectations becomes necessary for most IROs.
Play it cool
‘People are throwing money at this sector. Stocks can run up 10 to 20 percent per day on a piece of news,’ remarks Barden. ‘The IROs who do well in this sector are the ones who downplay their companies’ successes.’ You don’t want to get caught in the process of doing well one time, then doing better the next time and allowing expectations in the market to grow and grow,’ adds Barden. In a highly volatile market, the higher the company’s stock goes, the harder and further it can fall, he cautions.
Frontier Communications, based in Rochester, New York, recently merged with Global Crossing, a Bermuda-based company. Frontier is a good example of an emerging telecoms company that did well. The company occupied a niche providing services to small and medium-size businesses, offering data, voice and videoconferencing products and internet products.Two years ago, it faced problems with investors about which it was too tight-lipped when it came to explaining the reasons.
Subsequently, Frontier decided to bring in a new IR team to focus on a different strategy. ‘We began to be proactive with the financial community and it paid off,’ comments Tracy Gay, IR manager. ‘We hosted analysts, and our management team realized that they had to work with the IR department.’
Frontier had an interesting trajectory. A 100-year-old telephone company, until 1995 it was The Home Telephone of Rochester. Then it became Frontier and launched an aggressive investment strategy based on new technology. It installed fiber optic cable in 1997, when few people thought it was important, says Gay.
‘We had to sell the idea that this was not our father’s phone company. We had to show our new changes and the essence of the company,’ she says. The bet paid off. ‘We were being looked at by people who knew we would be taken over. We had new technology and old business sense. People in the market thought we were a good bet, since we would either be taken over by a bigger company or we would go at it alone,’ Gay adds. The IR team made sure investors knew of the options facing the company. After the merger, the investor relations team in Rochester began selling the international connectivity offered by Global Crossing, which is now completing a global undersea telecommunications network.
Different disclosure
Outside of the US, disclosure levels can vary quite markedly, according to both analysts and investor relations officers. That can be quite significant since most people interested in the telecoms industry don’t measure companies by their geographical status, rather by comparison with the rest of the telecoms sector. Still, there are key cultural differences in IR standards across different regions.
In Europe, the industry is migrating toward providing more disclosure. That is because they are counting on the capital markets to fund their new strategies, according to analysts and IROs. ‘In the monopoly days they were more secretive,’ comments Art Caldwell, an international telecoms industry analyst at Sanford C Bernstein, who deals mainly with Deutsche Telekom, France Telecom and British Telecom.
Jean Claude Grynberg, head of IR for France Telecom, agrees with Caldwell. ‘In this competitive age, investors are asking more specific questions. We have to explain a lot more – what we do in France, what we do in the world market,’ he says. The size of the company matters a lot in France, according to Grynberg, who says his department deals with 50 calls a day from investors and analysts. ‘In the past we only received calls from analysts, but today both investors and analysts are calling us directly,’ he adds. Like many IROs in this sector, Grynberg comes from within the telecoms industry. He was a business manager in France Telecom in the days when it was a state-owned enterprise.
The element that has propelled change in European companies, says Caldwell, is a need for more capital. ‘They need more investment, so they need more coverage in the market and they need to be more open.’
Across the Atlantic, in Latin America, the IR environment is markedly different. While Latin telecoms are widely traded and there is a robust interest from investors worldwide, the companies are still wrestling with the issue of disclosure; IR departments don’t play the same role as in other countries. ‘Most of the Latin American companies have good press releases and good presentations in roadshows and conferences,’ says Luiz Carvalho, an executive officer for Latin telecoms research at Morgan Stanley Dean Witter. But Carvalho notes that where they are lagging behind the curve is in their relationships with the financial markets. ‘These are incumbent companies, and are fully funded, so they don’t really have a lot of financial needs right now,’ he considers. ‘They are well capitalized.’
Novelty value
‘IR is still a novelty in Mexico,’ agrees Eduardo Alvarez of Telefonos de Mexico (Telmex). But he says that Telmex only discloses what is required by the Mexican stock exchange. The reason, he adds, is that out of over a dozen companies operating wireless, internet, voice and data services in the competitive Mexican market, only Telmex and Iusacel trade on the stock exchange. ‘We’re required to disclose, but we have to be careful not to tip off the other companies on our strategy,’ he says.
Telmex also relies on press releases, fax campaigns and its web site to appraise its investors and analysts of its activities, says Alvarez. ‘If you think about it, Telmex had its first IPO in New York in 1991, but it wasn’t really until 1992 that we had a very rudimentary IR. Since then, in 1994, the company began roadshows and conferences. As time goes by, we open up more to serve our investors,’ Alvarez agrees.
But IR will become more important for the Latin markets because of consolidation. ‘Getting bigger is the only safe option to avoid getting swallowed up by a bigger company. To do that you have to increase your value, for which you need more investors, and that’s when IR plays a role,’ explains Carvalho. As competition heats up, the Latin telcos will have to be more friendly to the markets.
Peter Firestein of Thomson Financial Investor Relations points out that, because large Latin American telecoms are generally the result of privatizations, they often become the focus of a national debate on liberalization. ‘This can give the IRO an interesting life,’ Firestein says. ‘They’re trying to tell the company’s story and manage disclosure, but must be careful not to offend a media that is often controlled by political parties and regulators who have been known to harbor their own agendas. These are often not your best friends, but, to an extent, they control your destiny.’
The answer is to ‘out-communicate’ them, Firestein says. ‘By being proactive, you can largely pre-set the terms of the public conversation. To the journalists who approach with a pre-formed point of view, offer them so much access and information that it shifts their context. To regulators who attack your performance in the media as a pretext for withholding tariff adjustments, express publicly your belief in the reasonableness of the system. It generally initiates a virtuous circle that results in a self-fulfilling prophecy.’
Firestein points out that the real audiences for the IRO are always the analysts and institutional investors. And their judgment of how well the company can function in its environment depends greatly on the way it manages such communications challenges. ‘That’s how the company’s reputation for disclosure and communication becomes an equity value-driver,’ says Firestein, who adds: ‘Latin American telecoms are the world’s most wonderful IR laboratory.’
Spain’s big run
An interesting contender in the Latin American telecoms sector is Spain’s Telefonica, which has made inroads in 26 of the region’s 35 countries. As an outsider, the company has positioned itself for the next push in consolidation in the Latin telecoms market. Telefonica’s IR department displays a preference for short roadshow presentations, concentrating on answering specific questions from its investors. ‘We make sure that we emphasize our advantage over our competitors, which is that we own all our infrastructure,’ says IRO Marsal Gifra. Telefonica is committed to the Latin market, which Gifra says has a tremendous growth potential. The company recently opened an office in New York City, from which it plans to make a big run for the US Hispanic market.
But it is in the relationship between IR departments, top management and the investment markets that there are stark differences among some of the companies in this sector.
For Connie Weaver at AT&T, CEO Michael Armstrong is her partner in IR activities. ‘He is the one accountable to the shareholders,’ she adds. ‘We have him communicate the company’s position as widely as we can.’ At the most recent analyst meeting, Armstrong made a public appearance, with his speech then archived on the company’s web site.
For European companies, which have seen aggressive competition and intervention from outside their domestic markets, such as the takeover attempt by Vodafone Airtouch for Germany’s Mannesmann, senior management has been taking a significantly more front-seat approach to IR operations. For example, Caldwell at Sanford C Bernstein argues that British Telecom has now become much more open than before.
In Latin America, Telmex has begun to understand the need to get senior company officials involved in their IR activities. ‘At the beginning all the investor relations work was done by the IR department, but last year we began to bring out our senior officers. Also, when analysts and investment portfolio managers come to our offices in Mexico, they meet with our IR officers and with senior managers,’ says Eduardo Alvarez.
CTC of Chile is also described as a company with a top IR department, which expertly places its senior management before the investment community, answers questions well and is ahead of its competitors in issuing reports.
Nobody doubts that the telecoms industry is in for an exciting ride over the next decade, nor that the challenges facing its IROs will grow more demanding and thrilling. The question marks are around just who they’ll be working for. As Sylvie Chevallier, France Telecom’s New York City-based IRO, predicts, ‘Ten years from now the players in the telecoms industry won’t be the same.’
