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With research coverage scarce, some companies are seeking professional help.
Kate O'Sullivan, CFO Magazine
October 1, 2005
Sometimes Mike Shea feels like a forgotten man. As CFO of Mac-Gray Corp., an operator of laundry facilities, he enjoyed the coverage of three sell-side research analysts in 1997 when the company went public on the New York Stock Exchange. Today, no one on the sell-side follows the Cambridge, Massachusetts-based company, which had $183 million in 2004 revenue. "I used to be able to get in touch with analysts and converse with them, but we can't even reach them any more," laments Shea. "The story is pretty much consistent. They say, 'I'm really busy' or 'I've got other obligations,' and there's just no room for us."
Corporate orphans are everywhere these days, as bank consolidations and cutbacks among the sell-side research analyst ranks have left fewer Wall Streeters covering the universe of publicly held companies. According to Reuters Research, 682 public companies have lost sell-side coverage since 2002. And according to The Nasdaq Stock Market Inc., 35 percent of all public companies lack research coverage.
With the traditional route to investor awareness closed, Shea and other CFOs are seeking professional help — investor-relations help, that is. In August 2002, Shea hired IR firm Sharon Merrill Associates to spread the word about Mac-Gray among potential investors. The company's stock price has since climbed steadily from around $3 to $11, and average daily trading volume has edged up from just 3,500 shares a year to more than 20,000 shares thus far in 2005. Institutional ownership has also risen as Shea and CEO Stewart MacDonald have attended more investor meetings and conferences. "By getting us out in public more often, [Sharon Merrill] helped us increase our institutional ownership," says Shea. "They set up meetings for us with funds that we would not have contacted on our own."
With the help of an IR firm and a major commitment of time and energy, CFOs can develop strategies for delivering their companies' messages to the marketplace. Raising a stock's profile in the absence of a sell-side analyst report takes work — but it can be done.
Bang for the Buck
IR firms proved their worth in a recent study by Gregory Miller of Harvard Business School and Brian Bushee of The Wharton School. Surveying a sample of 184 companies that hired such firms, the professors found "significant increases in their disclosure, press coverage, trading activity, institutional-investor ownership, analyst following, and market valuation."
One such fortunate company is Graham Corp., an industrial-equipment manufacturer in Batavia, New York, with $41 million in fiscal 2005 revenue. Graham began working with an IR firm a year ago, says CFO Ron Hansen, and since then its stock price and trading volume have risen to record levels. While Hansen points out that the company's link to the booming oil industry is the most important explanation for the rise in its stock price, he says the exposure generated by the company's IR program has likely increased the effect. "In the past we've gone through industry up cycles and we weren't hitting the highs we're hitting today," he says.
For small- or microcap companies, an IR firm can be a cost-effective alternative to hiring a full-time IR staffer. Prices can vary widely depending on the depth and breadth of IR work a company is seeking — from $5,000 for writing sporadic press releases and handling phone calls to more than $200,000 per year for strategic advisory services. "I thought [an outside service] would cost about the same as one full-time, qualified employee," says Shea. In part, that's why ZipRealty Inc., a real estate brokerage based in Emeryville, California (2004 revenues: $63 million), hired Integrated Corporate Relations (ICR), a Westport, Connecticut-based firm. "We can use them when we need them, but we don't have the expense of a full-time person who might not be engaged all the time," says ZipRealty CFO Gary Beasley.
Beasley says he needed an experienced IR specialist that could help him keep up with the Securities and Exchange Commission's latest rules, such as Regulation FD, which prohibits selective disclosure of material nonpublic information. "We felt that the institutionalized knowledge of a firm like ICR, which deals with dozens of clients all the time, was very important," he explains.
Getting the Story Straight
For an orphan that craves more attention, an outside IR firm can perform two valuable tasks: help craft a persuasive story about the company and then find the right audience for it.
"You have to understand what kind of an investment you are in the eyes of an institutional investor," says Deborah Pawlowski, chief executive of Kei Advisors, a Buffalo-based IR firm that counts Graham as a client. "You need to know what your key characteristics are so you can identify the kind of investor that wants what you are." Will a company appeal primarily to growth investors, or to value investors? Will it attract fund managers with small-cap portfolios, or those that target a specific industry, such as information technology?
Regardless of type, all investors want to hear "a compelling strategy for success" from a company's management, says Amy Hutton, associate professor of business administration at the Tuck School of Business at Dartmouth College. "How are they going to compete and create a sustainable competitive advantage in their industry?"
And a company's story needs to be backed up with facts and figures — the kind that an independent analyst would want in order to evaluate the stock. "Management needs to teach investors about what they do, and these metrics make it tangible," says Hutton (see "Numbers, Please" at the end of this article).
Finally, a company should make sure its story is told consistently in all of its communications, from press releases to its Website to teleconferences. Before any of this can happen, however, management must honestly appraise the business. "When a company is doing poorly, it's important for the CFO and CEO to assess the situation and be realistic about internal forecasts and budgets," says Tom Ryan, co-founder and co-CEO of ICR. "Companies must focus on financial performance and convey that performance in the most transparent manner possible."
Walk on the Buy Side
Because of the dearth of sell-side coverage, some IR firms are recommending that small-cap companies send their messages straight to the source: the buy-side investor.
"My perspective has always been that you should be approaching the folks that actually are making the investment decision with your story," says Pawlowski. Other target audiences include trade publications and other local and national media outlets, many of which are scoured by fund managers looking for investment ideas.
The drawback to the direct-to-the-buy-side approach is the amount of time it requires. "I am constantly on the road reaching out to people, rather than having them come to us," says Mac-Gray's Shea, who says he regularly calls and E-mails prospective investors, gathers names to add to the company's distribution list, and follows up with prospects whenever a press release goes out. "Where in the past we might speak to one analyst and that analyst's report would get read by a hundred people, now we are speaking to those hundred people ourselves."
For this reason, Ryan says he doesn't generally advise ICR's clients to target the buy-side on their own. "If you don't have the right internal tools to figure out whom to approach, then you're talking about a massive waste of money and time," he says. Adds co-founder and co-CEO Chad Jacobs, "This is why companies need to hire outside IR counsel."
In combing through the hundreds of potential investors to find those who would be the best fit, and in thus putting the management team's time to its best use, an IR firm may provide its greatest value. "We'll talk to anyone," says Graham's Hansen. "But as far as spending our time effectively, we rely heavily on [Pawlowski's] expertise and contacts to sort out who it is that we should be addressing to get the best return on our time and effort."
Shea says that thanks to Sharon Merrill, he spends only about 25 percent of his time on investor outreach. Without the IR firm's help, he estimates he could spend up to 75 percent of his time on the task. Indeed, one study by Princeton University economics professor Harrison Hong found that some CFOs were spending as much as 50 percent of their time on IR activities.
To achieve the coverage, liquidity, and stock-price appreciation documented by Miller and Bushee in their study, simply outsourcing investor relations to an outside firm is not enough, however. "It's a substantial time commitment if you want to do it right," says Miller. "When you talk to IR people, they'll tell you that management has to be ready to make this happen. It's not something you can do halfway."
Kate O'Sullivan is staff writer at CFO.
A critical part of selling a company's story to investors is backing up the initial, attention-getting information about its business strategy with the numbers that will drive any sophisticated investor's decision to buy the stock.
Amy Hutton, associate professor of business administration at the Tuck School of Business at Dartmouth College, advises companies to regularly disclose metrics that demonstrate the business's performance — metrics above and beyond the disclosure required by the Securities and Exchange Commission in quarterly and annual reports. "You can provide actual numbers that say a lot about the business that will hopefully affect analysts' forecasts," she says. By regularly releasing such numbers as monthly sales figures or an industry-specific metric such as backlog by product line (for manufacturing companies), the company creates an event that may garner press coverage, prompt follow-up calls from current stockholders, and provide a starting point for conversation with potential investors. "The companies they are going to invest in are the ones that make it easiest for them to find the numbers they need," says Deborah Pawlowski, CEO of Kei Advisors, a Buffalo-based IR firm.
Ron Hansen, CFO of Graham Corp., an industrial-equipment manufacturer in Batavia, New York, says the company has recently begun organizing conference calls and regularly announcing major orders. In addition, "the information that's being [provided] in our press releases is significantly more detailed from a financial perspective, and it's directed to what an analyst building a model needs to know," he says. The company also gives much more sales guidance than before, says Hansen. And the CFO now provides more detail about the industry's competitive dynamics, describing the company's sources of growth. "A person who wants to do the research can now dig a lot deeper into the underlying fundamentals of the business," says Hansen. — K.O'S.