Building a successful investor relations program for a small-cap company is no small feat. ‘The number one problem for small caps is visibility,’ says John Kroen, executive vice president of Dresner Corporate Services. ‘Large-cap companies are recognized by name, while small-cap companies have to rely on coverage from a number of smaller mutual funds and portfolio managers who look at these companies specifically.’
Another struggle for small caps is surviving today’s volatile markets. Recent market lows have been especially hard on small-cap companies. In mid-October, Nasdaq stocks fell sharply as investors showed concern over third quarter earnings. Throughout the early fall, the Russell 2000 index of small capitalization stocks also experienced a downturn. Much of the sell-off in the Nasdaq and small-cap markets was focused in the technology sector. Critics of the tech sector saw this as the end of ‘soft money’ and the beginning of real valuation for these stocks. The bottom had finally fallen out, so they said.
‘We have come through an interesting period in the last 18 months or so, particularly in the small-cap world and the equities markets,’ concludes Jim Marren, executive vice president of TorranceCo, a New York-based consultancy. ‘Our view is that the easy money has already been made, and the analytical community has learned a lot in terms of their coverage of the small-cap and high tech worlds.’
For those in the industry, the souring of the small-cap technology market was a virtual nightmare. ‘It’s horrible,’ says Dresner’s John Kroen, who consults for a number of small-cap technology companies. ‘You are looking at stocks that have decent stories and were trading at 15 to 20 dollars a share who are now trading at five dollars,’ he says. ‘At that point, institutions won’t even look at them.’
Dance steps
For Mike Carrel, CFO at Zamba Solutions, based out of Minneapolis, the biggest challenge is ‘trying to get sell-side coverage’. Zamba Solutions, named after a popular Latin dance step, is currently tapped at $106 mn. ‘We went public back in 1993, and at that point we had sponsorship from investment banks,’ says Carrel. ‘Then, in late 1996, we completely changed our business model, and lost our banking research.’
‘Going back and trying to get research after you went public many years ago is really difficult,’ Carrel notes. Zamba Solutions is currently covered by two boutique firms – Sidoti & Company out of New York and Craig-Hallum out of Minneapolis. ‘They focus on providing research for undercovered stocks,’ says Carrel, adding, ‘it just helps to get your name out there.’
Despite the harrowing task of attracting coverage, Carrel has a positive attitude. ‘The good news for us is that we have a great story and if we continue to execute over time we are going to get the attention of the analysts,’ he says. Carrel is equally aware of the dichotomy that underlies small-cap investor relations; namely the split between what happens in the market and how a company grows. ‘Getting coverage is not a two-month thing, it’s more like a two-year thing and the unfortunate part is that the markets are not patient.’
Team effort
Derek McClain, CFO of Trammell Crow Company, says getting sell-side analyst coverage has not been a problem for this small-cap firm. Based out of Dallas, Texas, Trammell is a real estate services company with a market cap of $500 mn.
‘We have tried to leverage our investment banking business in order to attain sell-side coverage,’ claims McClain. ‘When we went public in 1997, we wanted to emerge from that process with good sell-side research. This was a significant factor in who was chosen to be part of the underwriting group.’ When the company did a second offering last year, the underwriters were once again chosen on the basis of who could provide the best sell-side research coverage.
However, maintaining sell-side coverage is another story. ‘It’s very difficult. At the peak we had eight sell-side analysts covering the company.’ McClain admits the quid pro quo for sell-side research is a healthy investment banking business. ‘We are not a capital intensive enterprise and don’t have that much investment banking business to throw around.’
Surviving volatility
‘Liquidity becomes a major issue both for small-cap and mid-cap companies,’ says Dean Dranias, head of investor relations for Chicago-based Xpedior. ‘There has got to be enough trading activity for institutions to take some strong positions in a company.’
Last December, Xpedior, an e-commerce service provider with a current market cap of $94.7 mn, went public with a float of $10 mn. The company was a spin-off of Metamor Worldwide Inc, which retained 80 percent of the stock and used 20 percent for the IPO. ‘It was Metamor’s intention to spin off the remaining 80 percent to their shareholders as part of a tax-free spin-off in the later half of the year 2000,’ explains Dranias.
‘We were looking to set the stage for greater institutional support if the spin-off occurred, and maybe even consider a secondary offering,’ says Dranias. However, in late March Metamor announced it was being acquired by PSINet. PSINet thus bought an 80 percent stake in Xpedior but decided to allow the company to continue to operate independently. As a result, Xpedior’s IR team worked on building institutional support. By August, institutional ownership was up significantly from 30 percent pre-IPO to 60 percent.
Like others in the e-commerce sector, Xpedior’s stock trades well below its high at the beginning of the year. ‘When you look at the sector on the whole, you will find that the stock of companies that have faired well are still down anywhere from 25 to 40 percent from their 52-week highs,’ comments Dranias. ‘Right now we are trading at $2.5 and we went public at $19 and hit as high as $34.’
Dranias is now focused on building institutional support. ‘In the case of the small-cap companies you have got to go to the institutions that are geared to your industry,’ he says. ‘You have got to be able to give them some pretty concise views of your market position and you have got to be able to get a message out on the sell side.’
Building liquidity
Calpine Corporation’s story offers a good lesson in building liquidity. ‘Over the last couple of years, we have transitioned from a $500 mn market cap to around $13 bn,’ says Rick Barraza, head of investor relations for Calpine Corporation, a utility company based in San Jose, California. ‘Things have changed a lot. We issued more shares and on top of that the stock price has increased dramatically.’
Winner of the best IRO for a company under $1 bn at the Investor Relations magazine US awards, Barraza is held in high esteem by his peers and obviously knows something about small-cap IR. ‘Small-cap investor relations is certainly more challenging,’ he says. ‘We spent a lot of time trying to identify new investors who would be in tune with our rapidly growing story.’
Barraza says ‘one thing that has worked to our advantage is that we have excellent communication with the Street. We are very visible with everybody and we get as much of our story out to the public as we can.’ In order to create confidence among investors, Barraza says it’s important to perform. ‘We have been fairly conservative in projecting numbers; we always try to put out ones we know we can achieve.’
Clarity, clarity, clarity
Tony Johnston, senior vice president of corporate affairs at Westaim Corporation in Calgary, Alberta, says small-cap IR comes down to two things: the message and how you deliver it. ‘For us, with our various wholly-owned subsidiaries and our technologies, we become very clear in communicating our milestones to the financial community.’
Johnston took home the Investor Relations Magazine Canada 2000 award for best IRO of a small-cap company. This year Johnston would not qualify for the award because Westaim’s market cap has grown significantly over the $1 bn mark. ‘We are now considered a large cap, in Canadian terms, and this spring we listed on Nasdaq,’ he reports.
In terms of sell-side coverage, Johnston notes the difference between the US and Canada. ‘We haven’t had too much of a challenge in Canada but in the States it’s tough because they link it all to the investment banking side,’ he says. ‘If you are not doing issues or corporate finance-type of work, they are so stretched for resources that they are not interested in covering you.’
Johnston says the most important strategy is to send a clear message. ‘Whether they are technical milestones or commercial milestones we try to communicate the three or four most important things to watch for in each of the subsidiaries. Then investors know what to look for. That seems to be quite effective.’
Turning heads
Word on the streets of London says small caps in the TMT (telecommunications, media and technology) sector are making heads turn. ‘There is a lot of institutional money following the TMT sector because these companies are growing,’ comments Angus Maitland, founder of London’s Maitland Consultancy.
Maitland’s group represents small to large-cap companies in a variety of sectors from telecommunications to more traditional areas like the automotive industry. He says one of the main problems for small caps in the UK is that the research effort has become very specialized. ‘More analysts are specializing in big companies in big sectors, so if you happen to be a small-cap engineering company, chances are you will not be covered by an engineering specialist – you will probably be covered by a small company generalist, and in this case the quality of the research suffers a bit.’
The difference between small-cap investor relations and large-cap investor relations, according to Maitland, is that for a large cap the contacts are already there. ‘With large caps, the IR job is quite easy because you already have established followers like buy-side analysts within the institution as well as fund managers who take an interest in the company.’
‘When we work with small caps, one thing we try to do is generate interest through the trade publications that fund managers read,’ says Maitland. ‘We also contact the big sell-side brokers and try and establish what kind of interest they would have in following a given small cap.’
Emerging markets
The challenges facing small caps in Latin America are vastly different from what US, European and Canadian companies are up against. For instance, there is high government taxation resulting in low liquidity, low visibility and a shrinking market. ‘The challenge here is more broad,’ says Jose Marcos Treiger, head of investor relations for CSN, the largest integrated steel producer in Latin America. ‘[The goal is] to achieve a point where our local capital markets will become a principal source of capital for small companies and we are still very far away from that.’
As the president of the Rio De Janeiro chapter of Ibri (Brazil’s investor relations institute) and as the first Brazilian IR professional to join Niri, Treiger is an authority on Latin American investor relations.
‘The first thing a Brazilian small cap should do is to tap into international capital,’ he says. ‘Right now, it is very difficult to raise capital in Brazil; interest rates are very high and the only source of capital is the Brazilian National Bank for Economic and Social Development.’ Currently there are 54 Brazilian companies with ADR listings.
‘The majority of Brazilian companies would fit the qualification of small or mid cap,’ notes Treiger. ‘And most of these companies were just recently privatized, which was a major historical turnaround.’ Treiger sees the shrinking market as the main obstacle for small-cap companies in Brazil. ‘Brazil is having a difficult time because instead of growing, it is diminishing due to taxation,’ he says. ‘There is definitely a flow of liquidity towards the American market, which is a pity.’
Getting noticed
‘When you are a small company in an emerging market it is difficult to get attention,’ says Alejandro Droste, deputy financial officer at Masisa. With a market cap of US$330 mn, Masisa is not small by Chilean standards. In fact, the company is one of the leading manufacturers of particle and fiber board in Latin America. However, Droste explains it is a challenge to get attention because of the company’s relative size and location.
‘The main function of investor relations is getting noticed,’ says Droste. ‘Many times, you meet with investors and you realize they may like the company and it’s history a lot, but because of the lack of liquidity of a small cap, they just can not participate. Basically, the liquidity matters, regardless of what kind of good work you might be doing.’
As part of his investor relation program, Droste is very diligent about providing a good level of information to the market. ‘We are a very open company,’ he says. Droste also pays close attention to the sell-side analysts covering Masisa. ‘It’s difficult to get coverage so we take a lot of care to keep analysts informed and give them a clear picture.’ Currently, Masisa has one local investment bank, Larrain Vial, and three international firms providing coverage, including Salomon Smith Barney and JP Morgan.
In planning roadshows and analyst meetings in the US, Droste has the help of the Bank of New York, the company’s ADR holder. ‘When we visit the States, we also contact sell-side analysts who do not normally cover Masisa,’ says Droste. ‘We either organize a trip by city to visit different investment banks or we have one of our investment banks, like Salomon Smith Barney, organize a trip,’ he says. ‘We also get some help from our IR consultancy in the US, which is Citigate Dewe Rogerson.’
Big brother
Ricardo Alvial, head of investor relations for Enersis, says his company plays a mentoring role to emerging small-cap companies in Chile. With a market cap of US$2.1 bn, Enersis is the largest private-sector company in the Latin American electricity sector. ‘We are currently the coordinators for all the Chilean companies with ADR programs. They call us and want us to share our experience.’ Currently, Alvial says, there are 25 Chilean companies with ADR listings.
Enersis’ big brother role extends beyond ADR listed companies. ‘Many small caps in Chile don’t have a well organized investor relations program so it is difficult for analysts to get the details on their financials. For the last two years, small caps have been developing their own IR departments in order to meet with the current trend towards globalization.’ Alvial says Enersis has developed very close relationships with these companies in order to provide a model for investor relations.
Careful blend
‘From our perspective here, and certainly for small caps in under-followed sectors, the whims of the stock market can be particularly frustrating,’ says Trammell Crow Company’s Derek McClain. ‘What we try to do here is just be riveted on performance; we just kind of blindly adhere to the belief that ultimately consistent strong performance will be rewarded.’ For small cap companies, moving beyond the shadows of large cap players while surfing the waves of market volatility can be a tough task. For many, the only way to survive is to get bigger, and fast. Since the US capital market remains the equity center of the world, IROs from small caps across the globe are always looking for ways to tap into Yankee liquidity. But before they can move onto US radar screens, they have to create a buzz in their home markets. This is where small-cap investor relations turns into a fine art: when trying to build a company’s liquidity. As usual, success is based partly on luck and mostly on hard work. In short, small cap investor relations involves a careful blend of aggression, persistence, confidence, business savvy and imagination. At least that’s what the experts say.
