At companies of every size, executives who deal with investor relations must face hurdles posed by the economy, scheduling conflicts, securities regulation, and a plethora of other circumstances. At small-cap companies, however, they face additional challenges, often created by a scarcity of resources and by a continuing need to raise the company’s profile among investors and analysts.

Small-cap means different things to different people, but one common definition is a stock with a market capitalization below $1 billion; companies below $500 million often are referred to as micro-caps. Many market-watchers use the Russell 2000 Index as a guideline; as of early November 2003, the index had a market-capitalization range of approximately $1.2 billion to $117 million.

The challenges faced by small-cap companies include:

• Lack of brand name recognition. Many small-cap companies do not have the same recognition enjoyed by their larger-cap counterparts, so they find it more difficult to attract investors, particularly retail investors.

• Less liquidity. Due to their smaller float and relatively smaller pool of investors, small-cap stocks typically are harder to buy and sell easily. Since most investors prize liquidity, this can create a vicious cycle by repelling investors who will buy only liquid stocks.

• Higher volatility comes in tandem with lower liquidity. For most investors, high volatility is undesirable.

• Fewer resources. Most smaller-cap companies have fewer employees and other resources to handle a comparable workload; often the IR budget is relatively lower, too.

• Lack of sell-side research. Many smaller-cap companies have fewer sell-side analysts covering their stock. Since most investors use some formal analysis to make investment decisions, sell-side coverage is valuable for attracting investors who might not otherwise find an emerging company on their radar screen.

Selling to the Sell Side

That’s why, at many small-caps, “the biggest challenge is obtaining sell-side research coverage,” according to Tom Newberry, the vice president of corporate communications at Framingham, Massachusetts-based GTC Biotherapeutics. But as banks continually reevaluate the companies they cover in a tough economic environment, preference often goes to the larger, more established companies, while smaller companies see their coverage decline.

Of the S&P 600 Small Cap Index constituents that had some coverage at the end of 2002, this year more than 300 lost one or more analysts who used to cover their stock. Fewer than half that number gained additional coverage, according to a recent Thomson Financial analysis. The average number of analysts covering small-caps decreased from slightly more than 6 per company to about 5.5, an 11 percent decrease over the first nine months of 2003. From a different perspective, the “losers” lost nearly two analysts per company, while the “winners” gained slightly less than that number.

Adds Newberry, whose company has a market capitalization of about $100 million, “The emphasis is on the larger-cap names because of the flow of trading commissions.” Furthermore, an event at a large-cap company in the same industry, such as a delay in the approval of a key drug, can buffet small-cap brethren on the theory that the same problem will apply. “No matter what the IR person tries to do about that, it’s not going to change, you’re still going to get whacked pretty hard,” Newberry says. “The only way to counteract that is to perform differently, which is a ‘recover later’ kind of strategy, rather than a ‘prevent the slide’ strategy.”

Some small-cap companies compensate for a lack of traditional sell-side research by paying for written research from independent providers. Although Newberry believes that this “paid-for research” can be helpful for posting on the company Web site or for sending directly to the sell side or the buy side, it’s not an adequate replacement. “Paid-for research has no sales force, and that’s really the leverage of bank analysts,” he explains. “[Sell-side research analysts] have a megaphone that paid-for research doesn’t have.”

Managing the Time of Key Executives

Some small-cap firms are blessed with substantial sell-side coverage. Houston-based Swift Energy Co. — an oil and gas exploration and production company with a market capitalization of $400 million — is covered by 10 analysts. Director of investor relations Scott Espenshade credits some of that coverage to industry dynamics; it’s not unusual for large-cap energy companies to be followed by 30 or 40 analysts. He adds, however, that he’s been seeing pressure from some midsize firms that now must limit the amount of time they spend with Swift.

Espenshade understands that very well, since time management poses his own greatest challenge, which might be expected for a company that participates extensively in equity and debt conferences. It’s not simply a matter of managing his own time: Espenshade must manage the time of key executives so he can “get them out marketing” while balancing their need to run the business “back in the office.”

Swift’s solution is that a variety of senior management — such as executive vice presidents of key divisions, not just the CEO and CFO — are available to meet with investors. “You’re not dominating any of your senior executives’ time,” explains Espenshade, “and it gives the buy side an opportunity to see more breadth in your management.”

“Small” Does Have Its Advantages

Showing off that breadth can be one advantage enjoyed by small-caps. Others include:

• Greater interaction between investor-relations officers, senior management, and department heads. While IROs at larger-cap companies may need to jockey for a few precious minutes of senior management’s time, their smaller-cap colleagues enjoy easier access to key decision-makers. One dividend is that small-cap IROs may have an enhanced understanding of company strategies and initiatives, which in turn can be relayed to analysts and investors.

• More contact with investors. Many larger-cap companies with an extensive shareholder base find it difficult to interact directly with every investor, especially given their concerns about Regulation Fair Disclosure. Often they rely on public platforms such as conferences, and on mass communications such as conference calls and Webcasts, to disseminate company information. In contrast, smaller companies can — and often need to — focus on building deep relationships with a smaller group of investors.

• The opportunity to expand job skills. On the personal front, investor-relations professionals who can draw on fewer resources often wear more than one hat; for instance, they may take on the responsibility for public relations, too. Many IROs welcome this opportunity to expand their skill sets and overall knowledge.

“Small Cap” Can Mean Big Results

The small cap label doesn’t automatically limit what a company can accomplish relative to its larger-cap counterparts, maintains GTC’s Newberry. “Once you have the sufficient set of resources to work against your strategic IR plan,” he says, “you can get as good or better response as the large-cap names.”

Adaptation is the key, maintains Newberry. For example, instead of hosting an investor day centered around one company, Newberry advises small-cap companies within the same industry or geographic area to pool their resources to create a joint event (an approach offered through some chapters of the National Investor Relations Institute). This strategy can help attract investors from the region and beyond, explains Newberry, “because now there’s some leverage for the analysts’ time.”

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