Sunshine conference

I am sitting in the lobby of the Hyatt Regency Grand Cypress in Orlando, Florida, ringed by tropical plants, waterfalls, Buddha statues and screeching parrots, as the 2001 Niri annual conference wraps up. The exhibition hall is all but empty. The exhibitors have packed up their booths, brochures and chochkes and shipped them back to headquarters. A few stragglers are trying to decide which books to buy before the Niri book table packs up.

Given the market’s rollercoaster performance, it’s only fitting the 2001 Niri conference took place among theme parks. Niri chairman Jane McCahon described market volatility as one of the three major forces to have impacted IROs in the past year, in addition to Reg FD and a slow economy.

This year’s attendees were just as hungry for information as ever, and the panelists were just as eager to share their insights. Despite twelve months marred by budgetary constraints, poor performance, market uncertainties and unsettled shareholders, the Niri annual conference once again emerged as the year’s most important IR event.

Valuation situation

At this conference, the word valuation was on everyone’s lips – usually with the letters d-e before it. In a year when so many market caps have pitched and fallen like the King Kong ride at Universal Studios, many IROs came to find out the straight dope on how to measure their companies’ true worth.

Obviously, the internet boom had produced innovative valuation metrics – like web site hits, price-to-sales and even price-to-forecast sales – that in retrospect seemed like mere concoctions to justify overvalued stocks. On the other hand IROs understand price-to-earnings is not the only important measurement. ‘Non-financial performance measures are not just soft, squishy stuff,’ Ernst & Young corporate finance partner James Campbell claimed in one panel discussion. ‘Gaap only tells part of the story.’ Campbell estimates that non-financials make up 35-40 percent of the average company’s valuation, and in some cases it’s as much as 70 percent.

Kartik Mehta, research analyst with Midwest Research, listed the most important of these metrics: management’s credibility, strategy and ability to execute that strategy; insider ownership; and information from customers, vendors and suppliers.

The panel agreed that non-financials got a shot in the arm from Reg FD. Although the regulation caused companies to become more cautious while talking to the Street, Mehta said, non-financial information often sidesteps the generally understood definition of ‘materiality’ and therefore provides ample room for dialogue.

Star of the show

If there was one celebrity at the Niri conference this year it was Regulation FD. One third of the panels were specifically positioned to included discussions of the SEC’s enfant terrible, including ‘Developing sound disclosure practices under Reg FD’, ‘Effective use of webcasts’, and ‘The impact of the internet on retail and individual investors’. Robert Maire, managing director of Bear Stearns, quipped that he could start an FD hedge fund to short companies that are about to appear at investor conferences. The rationale: companies now prepare for conferences by pre-releasing all the information that may come up, thus causing a drop in their stock.

There was also a lot of genuine criticism of FD. ‘The idea that [retail and institutional investors] should be equal looks good on paper but I think in the long run it’s too expensive for the country,’ declared State Street Research & Management fund manager Larry Haverty, adding, ‘We’re in an information desert’ as a result of FD.

Haverty, part of an investors’ panel talking about whether or not the regulation should be repealed, claimed, ‘FD should go, but that practice of calling up the favored few should go along with it.’ Monroe Helm, a principal of Barrow Hanley Mewhinney & Strauss, and Roxanne Martino, president of Aurora Partners and a partner at Harris Partners, both agreed the rule should be repealed. The panel’s only dissenting voice was Alliance Capital Management portfolio manager Daniel Nordby, who said the rule ‘should be perfected and clarified… Do away with this deliberate vagueness which I think the SEC has left in place.’

Nordby hit the nail on the head – it isn’t the rule (‘Disclose to all audiences simultaneously’) that has everyone in a tizzy, it’s the rule’s vagueness. The important question is what constitutes materiality. And the answer can only be determined on a case-by-case basis. The Niri conference did a good job of analyzing FD from many points of view, but until the SEC clarifies its definition of materiality, or at least gives guidelines for how it will enforce the rule, the best advice for IROs is, ‘Be prudent and stay tuned.’

Sell-side evolution

Sell-side analysts occupied several panels again this year, and although some explained how they cover companies and put together their reports, everyone seemed to tiptoe around the topic of analyst credibility. (To his credit, Bear Stearns analyst Robert Maire admitted he left Morgan Stanley Dean Witter because of internal conflicts with the firm’s investment banking arm).

Conference attendees politely listened to the pundits yet saved their tough questions and accusations for the coffee break. ‘There is a conflict of interest between analysis and banking,’ ‘The Nasdaq is down 60 percent yet only one percent of recommendations are sell,’ ‘Too many sell-side analysts are out of touch,’ IROs confided.

Perhaps the conference would have concentrated more on the sell side’s evolution if it had more buy-siders. After all, no-one is better qualified to critique analyst reports than those who effectively buy them. In fact, the conference had no US fund managers until the last panel of the last day. In that discussion, Alliance Capital’s Daniel Nordby said that when returned to investment banking in the 1990s after a 20-year hiatus, he noticed there had been an ‘appalling collapse in the quality of research.’ Sell-side research has become advertising and little more than stock promotion, he added.

State Street’s Larry Haverty pointed to one area where the sell side can increase its strength: setting up meetings. He said the sell side can offer a valuable service by facilitating group meetings between institutions and companies’ middle management. ‘I think that’s becoming increasingly helpful to the buy side,’ Haverty added. ‘The facilitator role just makes my job that much easier.’

Not long after we all went home, sell-side conflict of interest took off in Congress, in a warning from the SEC and on the front page of business sections everywhere. The issue may have been largely ignored in Orlando but the ball is now being kicked firmly around the public arena.

Statistics from the 2001 Niri annual conference

Conference tactics
After putting together its annual conferences year after year (and strongly encouraging attendees to fill out their feedback forms), Niri has streamlined the process. This year’s event was organized with zero-fat, military-style efficiency. For instance, Niri decided to do away with the cumbersome binders that contain photocopies of every single presentation. While the handouts are valuable, they are too heavy for most people to lug around for three days. This year’s binder contained only the bare necessities. Handouts for individual panels were available during the events themselves, with the aggregated collection distributed via CD-Rom after the conference.
Even better, there was the usual real-time cassette production facility. For those who enjoyed the panel they attended (or heard about good ones they missed), they could buy a cassette tape of the panel just minutes after it ended. Some hardcore conference-goers even bragged they would buy the entire cassette library.
All in all the conference had good attendance, a good range of topics and a good blend of business/ relaxation and formal/informal interaction. The world’s biggest IR event is getting better every year.