In the aftermath of the $1.4 bn global settlement with major Wall Street firms, sell-side research arms have been forced to reassess how best to provide value to institutional clients. What they’re finding is something that most investors have been saying for some time: they want ‘access.’ Access to senior management at target companies, that is.
This development is hardly surprising. Since the SEC imposed Regulation FD, the buy side has seen its access to company management curtailed. So with companies generally ceasing to grant one-on-one meetings, investors are putting a higher premium on what private access they can gain.
‘With Reg FD, companies provide only certain information. Gone is the practice of selective disclosure, so there’s a perception on the buy side that it gets more from looking management in the face than from reading companies’ releases and 10Qs,’ says Tom Ward, director of IR at La Quinta Corporation.
Old role, new premium
Analysts have, of course, long served as matchmakers between company management and investors. What is new is the premium investors are placing on that role. Some fund managers go so far as to suggest that all of their commission dollars are aimed at corporate access. That’s a sentiment Samuel Jones, CIO of Trillium Asset Management in Boston, says he’s heard over and over.
‘This role for analysts of setting up meetings and tours has been routine for decades,’ Jones notes. ‘What’s new, and what has surprised me, is that all their commissions are really now going to such access. The written research that they provide is just the icing on the cake.’
Alice Lehman, managing director of IR at North Carolina-based Wachovia Corporation, says that, from her perspective, the shift in investors’ tastes came some time ago. However, circumstances – chiefly the bull market – kept the sell side focused elsewhere.
‘When I came into the IR role at Wachovia in 1996, I surveyed investors and sell-side analysts and found that what interested most everyone was access to company management,’ says Lehman. ‘In the mid-1990s, there was a very robust M&A environment picking up speed, especially in the banking industry. So at the same time as investors were looking for more access, analysts were focusing on working with bankers trying to gain more M&A business.’
Gaining access
That sell-side analysts were more closely aligned with bankers in the past is no secret. The buy side was, of course, aware of this dynamic which is why, according to Lehman, it set up its own research arms.
‘If you have your own buy-side research shop, you want to be able to come in and meet with management as part of your assessment of a company,’ she explains. ‘Now what’s happened is that regulators have said to the sell side, You can’t be involved with banking at all. So sell-side analysts have turned back to their roots and now they are being judged not only on their research, but also on their helpfulness to the buy side. And the number one way to be helpful is to provide access to senior management.’
Banks have been quick to capitalize on the demand. Many of the larger firms have set up what are known as corporate access departments, where the goal is rather obvious. ‘The role of corporate access was formalized at Banc of America Securities in early 2004,’ says Brian Tobin, managing director of corporate access at Banc of America Securities. ‘This is a service we provide to our corporate issuer clients and our buy-side investment clients. The sell side is the best place to go for this access because of the relationships we have with the issuer side.’
Typically, the analyst covering the stock will set up a meeting and is nearly always present. But given that some banks have cut back on their coverage, there are many companies without an analyst following their stock. That doesn’t exclude them from such services, however.
‘We do set up meetings with companies where there’s no coverage, though it’s less common,’ notes Tobin. ‘There may be no analyst coverage, but we might have a banking relationship. Banc of America Securities is part of Bank of America, so we have a tremendous number of business relationships with corporate America and those relationships can be leveraged for corporate access events.’
Setting limits
The typical format for analyst-led meetings is either a non-deal roadshow or, more commonly, a field trip meeting to the company’s headquarters where the analyst brings a small group of investors to meet with management.
Gary Flaharty, director of IR at Texas-based Baker Hughes, says analysts often bring groups of investors on bus tours over a two-day period and visit some of the many energy companies in the vicinity. ‘Generally, the analyst is in attendance and asking questions along with investors,’ he explains. ‘The format is anything from a breakfast or lunch to a plant tour, or just a meeting with management.’
Of course, there is a limit to how much time management has to meet with investors. Some firms have strict policies and won’t meet with investors privately, period. Others juggle the requests depending on management availability.
‘We do quite a few meetings where an analyst will bring in anywhere from five to eight investors,’ says Lehman. ‘We try to control the scheduling as much as possible, typically arranging, in advance, four to six all-day schedules every quarter. We have about 30 sell-side analysts, and we rotate them so they get to come in once or twice a year. It’s generally done on a first come, first served basis, but we’ll look at whether or not someone was in the previous quarter, and we may bring in someone who wasn’t in already.’
One concern for smaller sell-side firms – and analysts with a negative or neutral rating on a stock – is that the company will curtail their access. And it’s a real concern. In the recent IR magazine-commissioned Investor Perception Study, US 2005, 38 percent of a pool of 732 sell-side analysts say they felt shut out from a company following a ratings downgrade. Of those, 6 percent say firms have threatened to suspend their banking relationship following a downgrade.
Ward points out that it’s his job to remain independent of the rating an analyst has on his company. ‘We look to the sell side to help communicate our strategy and story to institutional investors,’ he says. ‘It’s our objective to make sure they’re as informed as possible, so I don’t see a difference whether they’re writing research or providing access. Just because an analyst has a negative rating, I’m not going to blackball him or her. It behooves me to make sure he or she has as much information as possible to make the right decisions.’
Following rules
Companies enjoy the convenience of having analysts functioning as concierges, including the handling of logistics. But it’s the firms themselves that bear the burden of complying with Reg FD. This is especially tricky, given that investors are there to gain an edge over the competition with the information they can extract from such meetings.
‘We have fairly strict disclosure guidelines,’ says Flaharty. ‘Either I or the assistant director of IR is present at every single meeting. We state our disclosure policies in our pitch book – one whole page on what we will and won’t talk about. We don’t talk about inter-quarter results, for example. To any guidance questions we receive, we give our answers based on our last publicly given guidelines – so we make it clear we’re only reaffirming.’
Ward says the best way to handle investors who are intent on gleaning non-public information is for management to know exactly what is public and what is not. ‘You have to know exactly and in totality what is public,’ he says. ‘You have to know your story, your strategy and what is publicly disclosed. That way you don’t get tripped up by someone trying to gain an advantage.’
Jones agrees that many investors are looking to ‘pick something up’. ‘Because the cost of facilitating these meetings is high, it’s a small group of investors – such as hedge funds – that can afford it,’ he notes. ‘It falls on the company to be vigilant.’
La Quinta’s investor relations policy is for the vice president of IR always to be present in such meetings. ‘Everyone here is very well informed on what is and what is not public information,’ says Ward. ‘You will always have investors who ask the questions anyway but we will, of course, not answer. For example, we’ve been very vocal about the fact that M&A is part of our growth strategy. So people will ask what we think about this property or that property, and our answer will be that we can’t answer. There is a dance between investors and management that has always existed.’
At Wachovia, Lehman is especially careful with conference calls, which is another format analysts use, especially with international clients. ‘We won’t get involved in sell-side-sponsored conference calls if they’re not going to be webcast or accessible via dial-in, ideally simultaneous to the call, or via a replay that is available for a specific period of time,’ she says. ‘We’ve had requests to participate in private conference calls where it’s been stated that the press is not allowed. We won’t take part in those.’
