About a year ago, I took the train from New York’s Penn Station to Waterbury, Vermont, otherwise known as Amtrak’s Vermonter line (cows and rolling green hills are painted on the engine, lest anyone forget where they’re headed). The journey takes eight hours – nine when you factor in an hour of delays that are so frequent on Amtrak as to seem scheduled. The trip was uneventful, with the exception of one notable conversation I overheard between two conductors.
‘I’m loving these tech stocks,’ one said as he punched a passenger’s ticket. ‘I picked one up a month ago, and it’s doubled.’
‘What’s the company?’ asked the other.
‘I just know the ticker.’
‘What’s it do?’
‘What’s it do? It doubles every month, that’s what it does!’
At this point, several passengers, me included, were nearly falling out of their seats trying to hear more. But the two conductors disappeared into the next car, and we never did get the ticker symbol. More importantly, we missed what in hindsight was an obvious warning signal: when train conductors are laughing about how much money they’re making flipping IPOs, somewhere in our midst is a speculative bubble about to burst.
I’ve ridden the Vermonter twice since the great equities sell-off of 2000, and the only market-related theme I’ve heard the conductors discuss is where they can get the cheapest meal in Bellows Falls. Gone, it seems, are the days when Amtrak employees, and a great many other investors, cared about the stock, not the company. In turn, the importance placed on informative and accessible communications is at a premium.
Semiconductors, wafers & fiber optics
For companies with complex messages to communicate – be it complicated products and services or diverse or changing corporate stories (answering the What does the company do? question) – the communications task is all the more difficult.
Consider, for example, the description of Durham, North Carolina-based Cree, which finds itself classified in the semiconductor industry. ‘Basically, all of our products are made out of silicon carbide. Silicon carbide normally wants to form 170 different polytypes, which include sandpaper. We’ve been able to develop a single crystalline structure that is necessary for semiconductors,’ says Cree’s investor relations manager, Fran Barsky.
A frequent response to Barsky’s explanation is, ‘Huh?’ – not exactly the sort of sentiment you want a prospective investor to have. And that same huh? could apply to Biogen, a Cambridge, Massachusetts-based biotechnology company ‘engaged in discovering and developing drugs for human healthcare through genetic engineering.’ Currently, the company’s revenues are generated from selling Avonex (Interferon beta-1a) for treating relapsing forms of multiple sclerosis, and from the worldwide sales by licensees of a number of products, including alpha interferon, hepatitis B vaccines and diagnostic products.
Got it?
Communicating either story to a room full of fund managers – let alone your average individual investor – might seem challenging, if not cruel. But rather than try to numb an audience into a comatose state with technical detail, Katrine Bosley, manager of investor relations at Biogen, says she focuses on applicability.
‘I think it’s important to find the entry point to the discussion that the audience can relate to. With biotechnology, everyone understands that people get sick, so the nature of the disease you’re trying to treat is a good starting point. Biogen is making drugs to treat a disease. They can relate to that, and then walking them through the rest of it becomes easier because they have a hook.’ Bosley says when she’s speaking to investors less familiar with the sector, she’ll talk about a disease such as MS, which most people understand. ‘Then I say we have a drug for this. It’s like peeling away an onion. With each discussion, you can introduce a new layer of technicality.’
Silicon Carbide and Interferon beta-1a might be two vastly different products, but Barsky takes a similar approach to Bosley.’ What we’ve done is try to bring it down to layman’s terms. Rather than trying to talk about the technology, we try to talk about what the technology is used for. And we tell investors the applications where you would find silicon carbide used. For instance, if you look at a Volkswagen dashboard, the blue light behind the dash is our blue LED, made from silicon carbide. Nokia has some high-end phone models that use our blue LEDs converted to white light.’
Diversified stories
But some companies present complex stories in a broader context, beyond a specific product. For a company such as Tyco, a diversified manufacturing and service company that sells everything from home alarm systems to undersea telecommunications systems, the task of simplification is monumental. And whereas both Cree and Biogen can assume most of their sell-side analysts will be well-versed in their respective industries, Tyco has many different businesses to explain.
‘Bob Cornell [at Lehman Brothers] and Jeff Sprague [at Salomon Smith Barney] cover us, and they are not multi-industry analysts, they are electrical company analysts. But these days, 40 percent of our revenue is electrical-related, so that part of our company is not a difficult story for an electrical analyst. Still, that doesn’t make it easy to cover us, because we’re a very difficult company to understand,’ admits Brad McGee, Tyco’s outgoing director of investor relations.
To make Tyco accessible, McGee, who was promoted to executive vice president and chief strategy officer in October 2000, says he tries to communicate a simple story by pushing consistent themes. ‘Rather than try to make people completely understand our business, we at least help them to understand those themes and how the individual businesses support them. Then it’s up to the investor as to what level of detail they want to go into on those businesses.’
While Tyco has been able to successfully court investors, even weathering an SEC inquiry into accounting irregularities (last year it was cleared of wrongdoing, and its stock has since rebounded), other multi-industry concerns haven’t been so lucky. Tomkins, the London-based, conglomerate featured in Investor Relations magazine‘s March 2001 cover story on ousted CEOs, until recently produced a range of products including Smith & Wesson guns, gardening equipment and food – ‘guns to buns’. The company is shedding these business lines to focus on manufacturing automotive parts and engineering construction products.
The restructuring is due in no small part to the difficulty of attracting investors to a diverse story, or stories. Ken Lever, finance director of Tomkins, says by focusing on one industry sector the company hopes to be more attractively valued by the market. ‘It also puts you in a situation where you can demonstrably show knowledge of the markets and the industry. The problem with trying to communicate for a diversified business is that the people at the center who handle the relationships with the analysts and investors are not seen as having the in-depth knowledge and understanding of the markets and the industries in which the various businesses operate.’
Perceptions & skill sets
There is, of course, one conglomerate held up as a standard of success the world over: General Electric. But would GE do as well had it been based in the UK? Regardless of the answer, there do seem to be regional differences in the way investors digest or at least accept complex stories. ‘I think the stock market in the UK is more preoccupied than the US market with the need for a company to be focused. In the US, it’s an issue, but not to the same degree. There are investors in the US market, particularly value investors, who are more prepared to tolerate a diversified company situation,’ Lever explains.
‘There’s a marked difference between North American and European and Asian investors,’ agrees Mike McGinn, director of investor relations at Mitel, a global provider of semiconductors and communications systems based in Kanata, Ontario.
Mitel is listed in the US, Canada, and London, which provides McGinn with a broad perspective on the various markets. But he notes that while the US may be more forgiving of diversified companies, investors and analysts there are actually more specialized than they are in other world marketplaces, making the job of explaining technologically complex product issues more daunting. ‘In America, the average investor and analyst can be very specialized. Even within Fidelity and Janus, they have their own analysts who cover an industry in minute detail. In Canada and the rest of the world, they tend to be generalists. So you have to understand who the audience is and tailor the delivery. You do a lot more tutorial work in Asia, Europe, and Canada than in the US.’
So what does the view look like from the other side? Keith McLean, who manages some $1.7 bn on behalf of Canadian fund giant Investors Group, says that while there may be differences in the regional appetites of investors, successful communications still comes down to skill set. ‘Some companies from Asia or Europe may not have their pitch down as smoothly as a US or Canadian company. It may just come down to industry and corporate focus. But I think there are companies that do it better than others. I would argue that Nortel’s and Cisco’s product lines are the hardest to explain, even stacked up against conglomerates. But they talk about their service and what you can do with those products. They boil down the message for mass appeal.’
Techno-geek not required
But while effectively simplifying a story is obviously crucial, an in-depth knowledge of the underlying issues is also important. Just how important, however, can vary from case to case. ‘You want them to have a solid handle on the numbers. But I need to be able to talk to someone with a technical understanding. Having said that, it’s usually okay to refer me to someone,’ says Allison Hamilton, an e-marketing and e-commerce analyst at Pacific Crest Securities.
McLean agrees that IROs don’t necessarily need to be steeped in the arcane language of technical jargon. But he does expect them to be able to present the information in an accessible way. ‘As far as I’m concerned, [it’s not the IRO’s responsibility] to know the technical specs, but they should be able to find an answer or refer me to someone with the answer.’
Bosley, who worked for five years in business development for Biogen before moving into investor relations, agrees that while her technical background has helped her, she does not consider it critical for the IRO role. ‘The IR person should be comfortable with the technical information. You have to be comfortable talking about it and translating it for the laymen. You don’t have to have a specific pedigree but you do have to be able to talk to the people in the field, absorb the information and then respond when people ask you about it. That’s the skill.’
Tools of the trade
To simplify complex issues and make them accessible to people without PhDs, companies employ a range of tools, from the internet to expanded literature. For its part, Biogen posts technical detail on its web site, and makes available scientific journals which contain data on its product. And last year Cree’s IRO, Fran Barsky, began including a partial listing of silicon carbide’s attributes in the annual report.
Barsky also encourages investors to contact the company – she takes questions directly from those people who are interested but scientifically naive. ‘I get a lot of calls from people who use the Yahoo message boards. Not that I ever directly respond on boards. But it’s interesting, when they call, if I can answer questions, they bring that information back to the boards and educate others, so you should always make yourself available to explain things.’
Mike McGinn, Mitel’s IRO who says he makes sure he is available for education-related questions, goes so far as to test the information he presents to investors and analysts: ‘Any information we take to a roadshow, we test it with folks here who may not have a good handle on the technical side, but who might understand the equity markets – like accountants. When you’re mired in this stuff you take it for granted. You could be talking in Chinese for all you know.’
