Investment banks stand or fall on the relationships they have with their corporate clients. With the current dearth of M&A and new issuance, investment banks are seeking ways to stay in touch with clients throughout the financial calendar and be seen to provide support. Their IR service teams, long present in the likes of UBS Warburg in London, are now found in all major regional financial centers.
In different banks the IR support team sits in different departments. Citibank’s is attached to the depositary receipts business; Goldman Sachs in London has set up theirs within the capital markets group; and JP Morgan, which already has a strong team in London, has recently set up a dedicated IR team led by Angus Kent in the Asian investment banking division. Kent is himself a former analyst, which is indicative of another trend in the IR teams assembled by investment banks – they are increasingly staffed by well-qualified and experienced personnel. Cazenove, the UK broker that counts half of the FTSE 100 among its clients, has just appointed Cynthia Alers, a Wharton MBA and former investment banker, to spearhead its new IR offering.
One undoubted advantage the investment banks enjoy is the amount of feedback they can provide – at least in theory. Equity salespeople are employed to spend their time on the telephone to, or in the company of, fund managers of all persuasions, from hedge funds to what are euphemistically referred to as shareholder engagement funds. In today’s financial markets, as centralized dealing becomes the norm, these salespeople are like account managers to their clients. Rarely does a fund manager, at least at the bigger firms, give an order to his salesperson. Instead, the order is passed through the dealing desk and may or may not end up with the broker concerned. The account managers have all sorts of information about their fund management clients, from the composition of the investment committees to the direct phone lines of their staff, and are well placed to learn what their views are on individual stocks.
Alasdair Mackenzie, who runs IR at Dresdner Kleinwort Wasserstein, draws on all the resources available within his organization. He even has some staff sitting on the trading floor to provide real-time market feedback. He describes his team as ‘at the center of activity’, and claims this enables them to provide high quality feedback to a client. This ensures that their next announcement, roadshow or event will be even better targeted and focused than the previous one.
Commercial taint
Two arguments are frequently advanced against relying on an investment bank for IR advice. The first is that any counsel is bound to be tainted by the bank’s own commercial agenda. There is some justification in this, not least because of the way that commission is handed out by fund management companies to brokers. All fund management companies review their broker lists regularly and allocate commission on the basis of the quality of service they receive.
This vested interest argument points out that one of the key voting criteria is access to corporates; brokers that arrange regular access to company management win extra votes and more commission. Yet, while this is certainly important, research shows that it is a long way from being the key determinant of commission allocation. A 2001 survey of professional UK investors by Greenwich Associates shows that direct access to company management accounts for less than 10 percent of the respondents’ commission allocation in the case of UK portfolio managers, and only slightly more in the case of those with European responsibilities.
Another argument from the vested interest lobby is that IR is simply a way for a bank to win more mandates. Not so, says Diane Faulks, VP, investor relations counsel, with Citibank’s depositary receipts team in London. She claims their service is simply to assist corporate clients in gaining increased visibility with investors.
‘Along with my colleague, Eugene Stevenson, I advise our global DR clients on best practice investor relations. Our service is primarily aimed at helping our clients with the US audience, which can be quite different from an issuer’s home market. US regulations, investors’ information demands, and the importance of the retail market are just some of the areas that need to be understood. Our advice is not restricted to the promotion of ADRs, but is equally applicable to the communication directed at the holders of ordinary shares, or indeed any stakeholder.’
Faulks claims to offer across-the-board service to corporate clients advised by the Citibank team. ‘Conversations with our clients can cover any aspect of IR from helping European companies target Asian institutions, to Latin American companies seeking European retail investors. That is what makes my role so interesting.’
‘As part of a global relationship team, we provide a broad range of financial services to our clients and are dedicated to their success. Our service must be professional across the board and cannot be self-serving,’ Faulks continues.
Gillian Crotty, who runs the corporate marketing team in Goldman Sachs’ London equity capital markets department, maintains the same argument: ‘Our IR advice to corporate clients is generated from our deep market knowledge and understanding of institutions and corporates generated from our daily trading and ongoing advisory roles. The IR advice we give is both objective and informed, covering the whole investor and stakeholder universe.’
The other argument for not relying solely on the advice of investment banks is that they focus almost exclusively on the buy side. Best practice IR programs focus not only on the direct audience of the professional investment community but also indirect audiences like the sell side, the financial press and other stakeholders such as relationship banks and corporate note-holders. This allows for room to supplement investment bank IR advice with that provided by independent practitioners like Abernathy McGregor, the US-based IR advisor, which says on its web site, ‘Audiences are interconnected: Investors. Employees. Customers. Competitors. Regulators. Communities.
The media. What happens with any one usually affects others. Good communications programs address the needs of all affected constituencies.’ There are also services such as proxy solicitation that investment banks do not provide and for which companies typically have to enlist the help of firms with relevant specialization.
Specialist advantage
Angus Prentice, a director at Thomson Financial, says he well understands why investment banks are keen to even out the peaks and troughs of a M&A activity by providing IR advice throughout the calendar year. He also acknowledges that getting shareholder analysis and roadshow logistics support from an investment bank can seem very cost effective. In the face of this competition, he points out that Thomson Financial seeks to provide a lot more value-added services, including weighting analysis, looking at different types of shareholder and better market commentary.
‘Thomson Financial tries to point out institutions companies really should go and see rather than ones the brokers want them to go and see. And we always give clients extensive briefing notes in advance of such a meeting,’ Prentice observes. ‘Broker votes are driven by how many companies fund managers get to see and equally, brokers will steer you in the direction of commission including high turnover clients. However, these may not be the right types of shareholder for a company since they are not necessarily long-term. If you want to prevent noise in the share price, then you need to make sure the company is seeing the right institutions and the right people at that institution – fund managers as well as analysts – and have sufficient information about the money that they run in order to make an informed presentation.’
It is usual for large companies to use both their broker and an independent investor relations consultancy, and Prentice says Thomson Financial works well side-by-side with investment banks. ‘We don’t mind operating in a room full of Merrill Lynch posters. However, it is important for a degree of independent advice to be fed into the process of targeting investors and developing long-term relationships with shareholders. We always review brokers’ prospective meeting lists that are given to our clients, comparing them with the shareholders of their corporate competitors.’
Best of both
Multiple advisors might not be an option for smaller companies without smaller budgets. The choice between investment bank and independent advisor may well be won by the former, especially as they tend to package the service with other advisory work so the true cost is not seen by the client. Larger companies, on the other hand, which can afford the luxury, will use everyone. Rio Tinto, one of the world’s largest companies, uses its broker, Cazenove, as well as independent IR firm Makinson Cowell.
Elizabeth Wade, head of investor relations at DaimlerChrysler, says there are still some things independent IR firms do better than investment banks. ‘They give genuine, independent, third-party advice, free from the constraints others are often under,’ she says. ‘And they undertake detailed work on shareholder identification and analysis.’
Investment banks and IR consultants work well together and indeed have complementary offerings, according to Jane-Astrid More, director of investor relations at IR firm Citigate Dewe Rogerson. ‘IR consultancies often work closely with investment banks on joint clients, both in providing data and in accessing sentiment from the sell side, where conflicts of interest or lack of geographical coverage could apply,’ she explains. ‘Similarly, the banks use the feedback from benchmarking exercises undertaken by IR consultancies to help a company shape its equity story or to improve disclosure and transparency.’
Unlike UK and US-based companies, says More, continental European companies typically do not retain a house broker or a single main investment banking advisor; rather they tend to use a range of investment banks. ‘Equally, they see benefits from the independence of an investor relations consultancy, which can provide dedicated shareholder identification services and give continental companies [which cannot access Companies House 212 data or SEC 13F filings to identify shareholders] an exceptionally accurate view on where their shares are held. Once this identification process is undertaken, companies feel they have more ownership over their investors and often seek more direct contact without the additional presence of the broker. Sometimes this arises out of perceptions of conflict of interest when, for example, brokers are seen to be active with competing companies.’
More insists independent IR consultancies make a difference. ‘Increasingly within continental Europe and in the UK, companies are looking for more systematic ways of targeting potential investors and are using a range of specialist consultancy services to do that. Not only can this provide broader coverage beyond a broker’s own client list, it can also give the company a greater feeling of control over the process as increasing amounts of time are being devoted to missionary roadshows.’
In-house power
However, it may not be investment banks that are the ultimate threat to the independent IR firm. The ever-improving quality of in-house IR practitioners may yet prove to be the real cause for extinction. Laura Martin, who took over IR at Vivendi Universal at the start of the year, has a CV that should strike terror into the heart of any independent IR practitioner. An MBA from Harvard, lengthy experience on both the buy side and sell side, and 20 years covering the media sector. Who can add value to that?
Perhaps the last word on this argument should come from a corporate client. Wade from DaimlerChrysler acknowledges the increasing importance of the in-house resource. ‘Be it from an IR consultant or an investment banker, genuine all-round knowledge of IR is relatively rare. As in-house IR grows in experience, the ability for any type of advisor to really add value has lessened.’
