Years ago, before investor relations became the burgeoning practice it is today, market intelligence was about gathering basic facts about a company’s shareholder base. Targeting consisted of finding the names of portfolio managers and analysts who might show interest in a stock, and surveillance involved trolling through regulatory filings to map out institutional footprints.
Today these practices have evolved into sophisticated disciplines that are central to IR. Most investor relations departments carry out targeting and surveillance to some degree because building buy-side interest is pivotal to their function. In fact, 92 percent of IR professionals say that attracting buy-side investors is an important goal for IROs who want to be considered effective at their jobs, according to a February 2003 National Investor Relations Institute survey.
Many large companies (and some smaller ones) use outside service providers for targeting, stock surveillance and other market intelligence needs. One advantage of using a third party is that some provide ‘phenomenal intelligence on what investors are doing’ in a given area, says Philip Talamo, head of IR at Lucent. And many IROs simply don’t have time to gather the data necessary to analyze stock ownership on a day-to-day basis. ‘If anything unusual happens, we get a report that day; it takes longer to identify the people behind it but daily feedback [is key],’ says James Kerr, director of IR at Unisys.
Aaron Hoffman, executive director of IR at Sara Lee, appreciates the depth of knowledge of institutional ownership and purchasing power that his market intelligence firm offers. ‘Knowing what an investor owns, whether it’s us or another stock, as well as the actual purchasing capability of a firm, is something we can provide to management prior to every meeting,’ he says.
Budget cuts combined with the fact that some experienced IROs have cultivated a deep knowledge of the investment community have led to the creation of some fairly sophisticated in-house targeting and surveillance practices. Kos Pharmaceuticals’ IR department developed a robust database of investors that identifies their investment style and criteria. ‘We even include details of how to divide [them] by city and sector,’ reports Constance Bienfait, executive director of corporate communications for Kos.
Jack Carsky, senior vice president of IR at Providian Financial, conducts his own surveillance by looking at Depositary Trust Company sheets every week. ‘If Wellington has $15 mn in our shares and is moving those shares, I know,’ says Carsky, who began his career working in stock surveillance and targeting at Thomson Financial.
Drilling down
While the end-goal of targeting and stock surveillance hasn’t changed, the depth of knowledge companies can gather about different market players and their activities has evolved significantly.
Finding out the name of a portfolio manager or analyst is just the beginning of the targeting process, explains Kerr. ‘Before meeting with buy-side people, we like to know whether we have met with them before, whether they are familiar with the story, whether they are now with a different firm, the nature of their company and whether they are long-term or short-term holders,’ he says.
Top targeting firms can drill down further to determine whether a particular mutual fund is doubling its weighting in a company’s sector. It can work out the average holding period for the fund’s lead portfolio manager, too. ‘You can also analyze investment patterns to determine a portfolio manager’s sensitivity to forward P/E, dividend yield, cash flow and projected long-term growth rates,’ adds Robert Borchert, head of IR at Atlanta-based NDCHealth.
New targeting tools are much more precise than traditional peer-based targeting methods. Alan Oshiki, managing director of New York-based Broadgate Consultants, recommends a targeting tool to his clients that offers a compatibility score. ‘It looks at the portfolios of every institution and matches several criteria – including earnings growth, sell-side following and market cap – before placing the company in some reasonable proximity to the median for the holdings of that institution,’ he explains. ‘It then assigns a score and the higher that score, the more compatible the institution.’
Falling stock prices have prompted some IR professionals to take a more active approach to targeting recently. ‘Our visits and meetings with investors are up 50-75 percent from last year,’ notes Kerr. ‘Part of that is people requesting visits due to the stock price being low and our financial performance being pretty good – but we have also been proactive in doing road trips every quarter.’
Conversely, a rising stock price convinced Doug Eisenbrandt, head of IR for Ciber, that it was time to hire a targeting firm. The Colorado-based information technology company’s stock price moved from a low of around $3.80 in March 2003 to a high of $11.85 in September and Eisenbrandt started getting calls from buy-side investors. ‘It was time for us to get out on the road and tell our story instead of letting the sell side take us around,’ he says.
Eisenbrandt wanted to take a proactive rather than reactive approach to building shareholder value. ‘I never want to get a call from investors saying, You came up on my radar screen,’ he explains. ‘I want them to come in front of mine first.’
New players
Changing dynamics in the marketplace have shone a spotlight on certain market players that weren’t traditionally part of surveillance efforts. Hedge funds and fixed income investors are now playing a more pivotal role in determining stock price. Hedge funds represent a whopping $650 bn in assets, and traditional investors such as pension funds and mutual funds are allocating more money to these private investment partnerships. IROs need to learn to recognize and distinguish between different types of hedge fund activity and establish a regular dialogue with these investors.
Hedge funds can play a valuable role in boosting stock in troubled times. Providian is a case in point. ‘These funds are the bottom feeders in the investor food chain so when our stock was trading at $2-3 and investors in Boston and New York said, These guys are finished, hedge funds stepped in,’ says Carsky. ‘And those that did, doubled or tripled their money. People need to understand what hedge funds are – some of them are still day traders and could whipsaw your stock.’
In the end there’s not much an IR person can do to influence a hedge fund’s position but it’s still important to communicate with them. ‘We are as courteous to hedge funds as we are to any institutional investor,’ says Bienfait. ‘We have a lot of hedge fund activity in our stock and have a tremendous short position at the moment. How I try to combat that is by targeting high-quality institutions to alleviate some of the hedge fund activity and potential short-selling with some long-term players.’
Likewise, fixed income investors should be on an IRO’s radar screen. ‘We are in touch with fixed income but we don’t target it,’ says Mel Stephens, vice president of IR and corporate communications for Lear. ‘If there is a particularly large or influential fixed income investor interested, we would initiate contact. But it’s really about monitoring and staying in touch with those that need to hear from you.’
In special circumstances, IR professionals may initiate a fixed income surveillance program, as Talamo did at Lucent. ‘As part of our recapitalization efforts, we asked our vendor to identify holders of our convertibles in case we want to buy them,’ he explains. ‘Also, if investors call us, it means we already know for a fact that they either own or have owned that particular security,’ he says. Along with the company’s IR staff, this information is especially useful to Lucent’s capital intelligence group, he adds.
Getting creative
Measuring the success of market intelligence is tricky. It can take several years after an initial meeting for an institution to take a position in a stock and IROs need results sooner than that in order to convince management that IR efforts are paying off. However, by keeping a record of investor communications and buy and sell activity throughout the year, it’s possible to analyze the relationship between the IR program and shareholder value over time.
‘We track the list of people we see throughout the year and then we look at what happened after the meetings,’ says Hoffman. ‘We also look at who met with them – senior management or an IR person – to determine whether there is a distinction so that we can highlight the value of taking management on the road.’
Hoffman’s IR team has also put together a graph that plots share ownership for the company’s top ten non-indexed shareholders, stock price and investor meetings over the previous twelve months, to measure the value of targeting.
It’s key for IR professionals to develop creative ways to measure and execute market intelligence strategies. For example, why not host a softball game with analysts and members of senior management as a way of initiating contact? That is exactly what Lucent did in early October this year – and hours before the opening pitch Talamo warned his players to target one guy in left field who owned no Lucent stock. After all, hitting a home run with investors in today’s market is really about thinking up new ways to play the same game.
