Hiring a specialist firm like Stellium can be a difficult decision for some management teams. Choosing to spend working capital on an investor relations program can seem like an extravagance when compared to many of the other financial commitments that a listed company may have. In this piece, we’ll attempt to lay out some of the reasons value proposition and why, in our view, IR strategy and implementation should be towards the top of the list when allocating a budget and the large ROI that can be achieved from a winning strategy.
Corporate management teams have a number of competitive activities vying for their time. Many of these relate to the ongoing operations of the underlying business that they are running. If you’re the CEO of a listed company, you’ll also undoubtabley be thinking about how the market perceives your business and have a view on whether or not it’s being fairly valued.
Every action a company CEO takes has the potential to impact the share price of the company. On occasion, after what is nominally a good piece of news is released to the market a company may find that its stock declines as opposed to rises as would ordinarily be be case. This could be due to the old adage of “buy the rumour, sell the news” or it could be due to an issue with misunderstanding or perception with the released news.
The market may have misinterpreted the release causing the stock to decline in value on the day. There’s a great quote from the Vice President of Investor Relations at Kraft Foods when talking about how the market may perceive an announcement or react to a company’s set of results.
You can read the full interview on the WSJ here. The other thing to consider when thinking about investor relations is the different audiences that a company may have.
The communications approach may change (either subtlety or dramatically) depending on the audience set that is being communicated with. You would not expect the discussion to evolve in the same way if you were talking to an analyst as opposed to a group of retail investors. Similarly, a long time investor in the stock will require a more detailed approach than someone who is fresh to the story.
a dialogue that focuses on identifying the gaps in perspectives on fundamentals and opportunity sets—the things that drive valuations—and discussing them directly, in a fact-based, well-supported manner is very effective.
Chris Jakubik, VP Investor Relations, Kraft Foods
Some of the audiences to think about
- Institutional investor (holder)
- Institutional investor (non holder)
- Retail investor
- Sell side analyst
- Sell side sales desk
- Other corporates in the sector
How does all this IR effort translate to value for companies?
We’ve written previously on the increasing importance of investor relations efforts (you can read that article here) along with employing social media in as part of a broad based IR strategy (which can be read here) and we would advocate strongly in favour of incorporating digital mediums into a clients IR efforts.
Done well, an effective IR strategy should have the effect of ironing out issues relating to perception, misunderstandings around the activities in the business and its value drivers allowing the stock price to reach a higher level as the misunderstandings and appropriate messaging reaches a wider investing audience.
Putting some numbers around this for the value created let’s look at the following scenario:
A client (“Company A”) with a market cap of $20M hires an IR firm to implement an IR strategy with the aim of improving its communications and feedback with the investment community with the goal of diversifying the share register and in so doing, closing the valuation gap with the peer group (who on average trade at a valuation 20% above Company A). Let’s also assume they are looking to raise $4M in equity during the course of the year to bolster their working capital position.
In consideration of this, the IR firm is paid a retainer of $10,000 per month (middle of the range when you look at the current charges across the industry at the time of writing).
If the IR firm can meet its objectives and start to close the valuation gap then by the time the stock price is 5% higher then Company A will have an additional $1M in market capitalisation & will be able to undertake their fund raising objective by issuing 5% less in new equity saving the company $200,000 in dilution. By either measure, the company has made a return on their investment in hiring the IR firm. Shareholders will be better informed and the returns should compound over time as the IR efforts continue.