Sunday, March 10 was the second anniversary of the Nasdaq Stock Market’s all-time peak. With the key US technology index still hovering around the 1,800 mark – well below the mythical 5,600 achieved two years ago – and many research analysts maintaining cautious views on the possibility of an upturn in the near future, technology investor relations today is a far cry from the glory days of the late 1990s when shareholders, bankers, executives and employees were laughing all the way to the bank.
During the TMT boom in the late 1990s, small caps were getting unprecedented attention from investors and the financial media. Whereas in a normalized cycle these TMT stocks would have been too small and lacking of track record to warrant an inclusion in the portfolios of most institutional investors, the rules changed as portfolio managers simply couldn’t ignore the extra performance boost these hot stocks delivered. Right now valuations of large-cap household names in the TMT sector are providing plenty of opportunities for adventurous investors, and small caps continue to find it hard to drum up coverage and attention among analysts and investors.
So, what do you do if your company is a small quoted company operating in the shunned TMT sectors? How do you market your company to the investment community, build its financial brand and grow its profile?
Lack of analyst coverage doesn’t mean you’re totally invisible
The biggest dilemma for such companies is they usually lack the analyst coverage that would provide news flow in the form of research notes and media dialogue. And they aren’t likely to receive coveted invitations to broker conferences where companies have an opportunity to present to dozens of institutional investors.
As an IRO you should realistically assess your company’s positioning among sell-side analysts. A micro-cap (below $200 mn in market capitalization) is unlikely to be covered by any sector analyst, however some research houses with well-resourced small-cap teams might pick it up if they believe the story is interesting enough.
A small-cap company ($200 mn-$1 bn market cap) may be covered by a sector research team, perhaps by junior analysts taking their first steps as a publishing analyst. Therefore, it is imperative that you establish and maintain relationships with sell-side analysts – both the sector specialist and the small-cap team if the house has one. Ask if they would like to be on your e-mail list, send them your annual report, invite them to your investor presentations, and forward them any interesting industry articles or research that you come across. Find out who the junior analysts are in the team and establish a relationship with them, as they are likely to look for opportunities to build independent expertise in the sector. Even if your IR efforts do not result in actual stock coverage, the analyst might include your company into a larger industry sector report, or you might be invited to speak in a panel at a broker conference.
Go directly to the investors
Because a small-cap company cannot rely on sell-side analysts to do its investor marketing, it needs to go directly to the investors. This requires careful research and targeting. Most large institutional investors now have in-house research departments, and buy-side analysts tend to cover a larger universe of stocks than sell-side analysts (they are free from time-consuming sell-side activities such as research writing and deal work). So they can pay attention not just to the usual suspects but to emerging companies in their sector.
However, buy-side analysts have to operate within certain investment constraints, and this is where you need to do extensive research in order to ensure your efforts are focused on those analysts with the ability to include your stock in their funds. Some buy-side analysts provide research for several funds, which means that targeting is not straightforward, but you should try to find out any investment constraints set by the funds’ compliance rules and the analyst’s personal investment style (preferred valuation methodology and key investment criteria such as growth rates, gearing or free float).
Note that buy-side analysts tend to rotate sectors so you should update your database every six months in order to make sure you are targeting the right person. Furthermore, many institutional investors have specific small-cap funds, often without a research analyst, so you need to find out who the portfolio managers are and establish a relationship with them.
Rising to the challenge
Hedge funds are a vital stakeholder group. Despite the difficult logistics, get to know them.
The global hedge fund industry is enjoying phenomenal growth, estimated to comprise over $500 bn in assets under management. This half trillion is invested by over 5,000 funds, most of them small (less than $50 mn under management), and many located outside global financial centers.
Hedge funds have been criticized for increasing market volatility and multiplying downward pressure on stocks because of their ability to get in and out of stocks quickly, short sell and use any form of derivatives under the sun. True, many are short-term investors, but unlike pension funds and mutual funds, hedge funds have little or no investment constraints, other than what is set in their preferred investment strategy, which can be extremely flexible when it comes to taking opportunities as they arise. That means that if they think they can make money with your stock, they will invest.
Get to know the largest long-short funds in the main financial centers, and should they want to meet with you, prepare to be challenged. The hedge fund industry has attracted some of the most sophisticated and talented investors over recent years, and company meetings with hedge fund investors are often a true acid test of management’s ability to communicate the company’s strategy to the capital markets.
Don’t ignore the financial media, but focus your resources carefully
You should understand clearly what your financial PR firm can and cannot do for you. The financial press and TV programs report on those companies and events that impact the global capital markets, and any promises of extensive media coverage should be taken with a pinch of salt. After the technology boom the financial media is almost unilaterally cynical towards the TMT sector, so tread with care.
But there are avenues where even a small technology company can make an impression. Instead of focusing on the national dailies, the Financial Times and the Wall Street Journal, work with both online and off-line industry magazines that are read by investors and analysts alike (such as Red Herring or netimperative.com).
If you have any analyst coverage at all, make sure the relevant journalist knows who the analysts are. You are more likely to get a story printed if the journalist can get a comment from a sector analyst – although this could be a double-edged sword if the analyst is negative on the company. Ignore the media at your peril. In today’s capital markets the financial media is very much a player, not a silent observer.
No jargon
Industry jargon is a thing of the past. The technology bubble created a new language, which was designed to make small achievements look like giant steps. It does not help in communicating the superiority of your strategy or your product; these days it is normally met with cynicism and suspicion. An investor or a journalist does not have time to delve into the deeper meaning of scalable platform or strategic partnership. Your message needs to be absolutely clear at first glance.
In summary, for a small-cap technology company, the key is to be focused. Your ability to deliver shareholder value does not depend on having a star analyst write about your company or how many column inches you get in the financial press. Go after the money directly. That way you can harness your resources in a way that is most likely to generate an impact. The worst mistake you can make is to stop communicating because immediate investor demand and analyst attention have waned.
Heidi Fitzpatrick worked as a senior analyst at Lehman Brothers covering the European internet sector, and prior to that she was IR manager at boo.com. She now works as an independent consultant advising companies on their IR strategy.
