Seven common mistakes public companies make when dealing with the capital markets
It’s amazing how efficiently some companies damage their capital market relationships. If you’re looking to inject a little ‘excitement’ into your otherwise dull investor relations program, committing any of these mistakes will make your life a lot more hellish. I have grouped these common mistakes into what I call the seven deadly sins of investor relations.
The Seven Sins:
I recently met with a sell-side analyst who told me just how much he enjoyed being condescended to by a public company. “Oh, I just love it,” he said. “After investing time out of my 90 hour work week to comb through a company’s public disclosures, update my financial model and write a report, I just love when a CEO or IR person calls me up and treats me like an idiot because my report somehow didn’t capture a fact that was never disclosed in the first place.” The sarcasm was actually beading up and dripping off his forehead while he was saying this.
A good analyst will update their recommendation based on a balance between the performance of your company and the performance of its shares. If the value of your shares begins to outpace the value of your company, then an astute analyst should put a “sell” or “hold” recommendation on your stock. Period.
Now, if you go and throw an undignified fit and act like a cry baby when (not if) this happens, you can do serious long-term damage to your analyst relationships (Word gets around). Most of the time, if you have a good relationship with your analyst, they’ll give you a heads up outside of market hours before their report goes out. If their recommendation is supported by the facts: thank them for the heads up, be calm, and carry on. If it’s not supported by the facts, then kindly and professionally point out the discrepancy with supporting evidence.
While being mysterious might work wonders in the dating world, it has the exact opposite effect on your capital market relationships.
If your disclosures and reporting make your business difficult to understand, you’re unlikely to garner coverage from the sell-side and investment from the buy-side. Many companies claim they report in this manner for “competitive reasons.” Whatever the reason, if your financial reporting is indecipherable then your investors won’t trust you, you will trade at a discount, and your cost of capital will be higher than necessary.
Instead, provide your investors with clear reporting and a long-term plan with measurable milestones. Executing against these milestones will earn you greater credibility.
How many times have you been asked a question that would require you to reveal material undisclosed information? The real irony in these situations is that the person on the other end of the question doesn’t (or shouldn’t) expect you to answer. It’s a test. If you choose to selectively disclose material information they will probably think one thing:
“I am dealing with an unprofessional chump.”
That’s right. Not only did you break the law, now the person sitting across from you thinks you whisper material information to anyone who will talk to you. They won’t trust you and they probably won’t invest in you.
Another thing you want to be discreet about with the buy-side is the timing of when you will raise debt or equity capital. The minute you talk about raising capital, institutional demand for your securities in the open market will dry up. If institutional investors become aware that your company is raising capital in the near-term, they will wait for the new offering because they will be able to buy at a discount and buy the exact block size they are looking for.
Among all the deadly sins of investor relations, this is one of the worst. Years ago a colleague of mine sat in an investor meeting with a CEO who spontaneously decided to tell the investor that his company would deliver a “three-bagger.” For those unfamiliar with the term, the CEO was saying that the company’s share price would increase by a factor of three. The blood drained from the investor’s face and he abruptly ended the meeting. Then the CEO abruptly lost his job a few weeks later.
Credible CEOs and CFOs never talk about:
- Their company’s future share price;
- How undervalued their company is;
- Their value relative to their peer group;
- The analysts that are going to launch coverage on their company (before they officially launch); or
- Their predictions on what their analysts’ recommendations and target prices will be.
Nevermind the liability created by any of these actions, acting in this manner is detrimental to your credibility. You will succeed only in alienating both the sell-side and the buy-side.
Another area of promotion to be mindful of is the use of hyperbolic language. If you catch yourself uttering any of the following phrases, there is a good chance you are coming off as promotional to your audience: Extremely major (Yes, a CEO said this recently); World’s most advanced; World’s largest; It’s gonna be ‘uge; etc. You get the idea. If you are going to say something over-the-top, you better have bullet proof evidence to back-up your claim. And even if the claim is bullet proof, you should acknowledge the over-the-top nature of what you’re saying and immediately provide backing evidence.
The companies that do best in the capital markets are those that under-promise and over-deliver.
You know that broker-dealer who has enthusiastically worked their fingers to the bone for you? I mean the one who has really delivered some valuable work basically for free. We’ll call these guys the “Good Guys”.
The next time you raise capital, if you exclude the Good Guys from your syndicate or give them an insulting percentage, then at the least you will put a serious dent in their enthusiasm to do work for you. It is also very possible you will lose their support for good.
An extreme example of exclusion is raising money through an un-brokered private placement. This hurts everyone in the sell-side. It also hurts you as a public company because the sell-side will be very reluctant to allocate any more resources to you.
Here are a few more behaviours that will hurt your sell-side relationships:
- Exclude broker-dealers that are providing research from institutional marketing;
- Threaten to scuttle a fully marketed debt or equity offering;
- Undermine your broker-dealer by mishandling your roadshow commitments; and
- Utilize an investor relations firm that competes directly with the broker-dealer.
If your company has just put out some bad news, you should get out in front of it. Meet with your investors and provide them the context they need to truly understand what is going on. Unfortunately, many companies burn their bridges by avoiding their investors during challenging times. Once an investor puts you in the penalty box, it’s very difficult to get back on the ice again.
There is always a natural tension between the interests of broker-dealers, investors and public companies. That said, the capital markets represent a critical resource to companies and their management teams. Broker-dealers provide research coverage, access to capital and bring forward accretive M&A opportunities. Investors provide capital for management to allocate.
The common mistakes described above negatively impact capital market relationships and, by extension, shareholder value. We’ve seen the consequences to companies that consistently make and repeat these mistakes. Increasingly, shareholders are holding management teams accountable for their sins.
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