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t Investment Community Research

RIVEL RESEARCH GROUP JANUARY 2013

© 2013 Rivel Research Group. All rights reserved.

No part of this publication may be reproduced in any form or by any

means, without permission in writing from the copyright owner.

HARNESSING IR’S POWER TO

IMPACT A COMPANY’S VALUATION

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IR, more than any other venue, is

the road by which investors learn

about a company’s investment

appeal, stay current on

important developments and

receive the insights necessary to

support informed and favorable

investment decisions.

What drives valuation and helps lower the cost of capital? There are any number of popular

culprits: managerial prowess, strategic acumen, favorable secular trends, R&D breakthroughs

signaling growth potential, a track record of financial success, reliable returns … the list goes on

and on. But for all of these value drivers, there is a very simple common denominator without

which the institutional investors who have the power to move your stock price are immobilized

– knowledge. Given the intense competition to gain a sparkle on the buy-side radar screen, it is

imperative for public companies to ensure that investors are endowed with as fully

comprehensive array of information and insight as possible. Doing so facilitates and prompts

informed investment decision-making by the investment community. . If the story has not been

communicated effectively, if the facts are not readily at hand, if the right senior executives have

not been made available, full investor knowledge is not achieved and fair valuation could be

compromised.

Enter investor relations (IR), perhaps one of the most

underappreciated and underrated sources of knowledge

and purveyors of company investment insight. Think of

all the money, the millions upon millions spent every day

marketing products and services to the general public,

consumers and business-to-business clientele. The new

product and concept tests, the national ad campaigns,

the PR initiatives, the lobbying … the cost is staggering

(and rightfully so).

By comparison, however, one of the most powerful audiences commanding day-to-day

influence over a company’s market value often times doesn’t get its proper due– the

institutional investment community. The amount of money spent in capturing the attention

and support of the buy-side pales in comparison to these other well-established forms of

corporate outreach. Simply put, IR warrants the greater emphasis and focus typically lavished

on other marketing initiatives. After all, it is charged with marketing something equally as

important as any product or service … its currency – the company’s stock.

Around the world, a typical IR budget for a mid-cap company – one with a market capitalization

of say, $1 to $5 billion dollars – often is not much more than $500,000, not even enough money

to pay a couple lobbyists or buy 30 seconds of advertising time during the Super Bowl. Investor

relations officers (IROs) often have to fight tooth and nail for their “fair” share of a budget a

company allocates to external communications. It shouldn’t be this way. Research shows that

IR has an undeniable impact on valuation. This is because IR, perhaps more than any other

venue, is the road by which investors learn about a company’s investment appeal, stay current

on important developments and receive the insights necessary to support informed and

favorable investment decisions. These are the very decisions which drive valuation.

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70% Percentage of US institutional

investors that believe IR has a

meaningful impact on a

company’s valuation

“Companies have no idea how much impact the personality of the

individual IR person affects the view of a total company. If they

chose an experienced person in that role, it pays back in spades,

but they can’t see it.”

—Portfolio manager

“If it is good IR but the news they have to communicate to me is bad, then even if the stock doesn’t sell

at a premium, maybe it makes me more interested in buying the stock in the future. Ultimately, the

quality of the IR is kind of important in my investment choices.”

—Buy-side analyst

“Yes, it affects how people

perceive the company. They

are the voice to the Street.”

—Buy-side analyst

-20% The “Poor IR” Discount

Measuring the IR effect

The institutional investment community believes in investor relations. They accept IR as an

essential conduit to the inner workings of a corporation (management’s mindset itself at times),

and its investment appeal. When asked to identify the sources of information they value most

when learning about investment opportunities and, more significantly, when making

investment decisions, buy-side analysts and portfolio managers

invariably rely on the bevy of intelligence coordinated by the

investor relations department. This includes earnings calls,

management access, face-to-face meetings, roadshows,

conference presentations and the IR website. Investors look to

IR as an invaluable resource in which to corroborate the often

bewildering array of material information available to them on

the hundreds of companies that they follow. In short, IR is the

gatekeeper to much of the unadulterated intelligence they

require to support their investment decisions.

Accordingly, the buy-side believes investor communications has a tangible impact on a

company’s valuation (one that is even more pronounced when a company is burdened by IR

that is perceived to be “poor”). Earlier this year, a nationally representative sample of 164 US

buy-side analysts and fund managers from various industries and with an array of different

investment objectives, were surveyed on, among other things, whether or not good IR has a

meaningful effect on a firm’s stock price. The results were convincing. Better than two out of

three (70%) said they believe it does. As a few respondents pointed out:

When asked to quantify this impact, the results were quite

compelling – and have been so on a consistent basis over the last five

years. In 2012, the US buy-side believes IR accounts for a total

variance of 30% in a company’s valuation – ranging from a premium

of 10% for “superb” IR to a discount of fully 20% for “poor” IR.

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While the premium associated with top-notch

investor communications is impressive (a

consistent 10% bonus), the valuation penalty of

ineffective IR is far more dramatic and appears

to ebb and flow with the economy. It peaked at

a negative 25% in 2009 at the rock bottom of

the global economic downturn, lessened as the

economy recovered in a fitful manner in 2010

and 2011, but has again ramped as macro

uncertainties persisted and fear of a double-dip

recession once again intensified. The chart to

the right illustrates these findings.

The evidence of IR’s power extends well beyond

the United States and is felt even more acutely

in other countries. For example, the delta

between good and poor investor relations is

33% among investors domiciled in Europe and

fully 40% for those based in Asia-Pacific

countries. It is worth noting that European and

Asian institutional investors are more apt to

attribute more upside impact to the valuation

from effective investor relations.

At a minimum, these data points reveal sufficiently compelling evidence so as to warrant

companies to re-evaluate their investor relations effort and the corporate resources devoted to

it. Any impartial cost-benefit analysis demands it. But paying lip service to a commitment to

proactive investor outreach, regardless of how well intended, is the easy part. This includes

touting unrivaled responsiveness (gamely promising same-day or 24-hour turnaround on any and

all investor inquiries) or hiring seasoned, highly-respected IR professionals. Superb investor

relations requires much more. Some of the touchstones of a superb IR program include an

ongoing commitment of time, effort, forthrightness, transparency and robust disclosure as well

as a C-suite that regularly avails itself to the investment community. Only those companies with

IR programs that are firing on all cylinders will reap the full valuation benefits (while waylaying

the negative effects of poor IR).

That said, an optimal corporate IR program should in no way come at the expense of peak

operational execution by the C-Suite and management. No one on the buy-side expects or

advocates this. Rather, investors are advocating ensuring that the essence of a company’s

investment thesis, its strategy, key risks, benefits and opportunities are widely known so that

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“I will not take a position without

meeting with management.”

Portfolio manager

“We have a policy that we will not

buy a company’s stock unless we’ve

met management recently. It’s a non-

starter if we don’t.”

Portfolio manager

“There’s how I feel about it and there’s reality. How I

feel about it is ‘absolutely essential’. Reality is that I

don’t always get that opportunity.”

Portfolio manager

“If it’s a company that I am totally unfamiliar with,

then I would like to meet management. I’ve been

managing portfolios for over 30 years, so if I have

knowledge of the company and “know” the

management and what they’ve been able to produce

in the past, then I am less likely to require a meeting. If

there’s a new management that just took over, then I

would require it.”

Portfolio manager

“It isn’t important before I take a

position, but it is important before the

position becomes a large position. We

can take the position and meet with

them later.”

Portfolio manager

informed investment decision-making is triggered rather than decisions made on supposition

and incomplete information available from external sources. There are some fundamental

expectations of the C-Suite:

Management Access

Despite the C-Suite’s natural aversion to roadshows or one-on-ones, there is no substitute for

direct management interaction with the buy-side. Certainly, the IRO can play the proxy

CEO/CFO at times and advise investors about the investment merits of a company’s stock. But

when it comes down to brass tacks, the one-on-one meeting with senior management is often a

buy-side-mandated prerequisite. It is an absolutely invaluable means by which investors

investigate and weigh the pros and cons of a company, to personally test the mettle of a CEO or

CFO (kick the tires if you will) in deciding whether to invest, to sustain or add to an already

existing position or sell a stock in favor of an alternative investment.

For reasons such as these, companies that do not facilitate direct interaction between senior

management and the buy-side risk alienating one in three North American investors (36%),

virtually half of those based in Europe (48%) and fully three-quarters of those domiciled in Asia-

Pacific countries. As the following chart indicates, these are the proportions of institutional

investors around the world who earlier this year stated that they would still need to meet

senior corporate management before buying a given company’s stock, even if the IRO was able

to answer all their questions about its investment appeal or thesis. Clearly, it is a mistake to

hire a skilled IRO with the expectation he or she will obviate any need for the CEO and CFO to

regularly meet with the Street.

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Moreover, one meeting very often is not enough. Buy-side analysts and investors the world

over usually don’t invest in a stock after a single management session, even if that meeting was

with the CEO or CFO and considered highly informative or beneficial. The natural inclination of

many investors is to weigh the merits of taking a position in a stock over time, often seeking to

test the management waters more than once before taking the plunge. From another

standpoint and using an even more compelling analogy, it is a rare circumstance indeed when

people decide to marry after a single date.

Accordingly, fulfilling investor requirements for “superb IR” and the requisite amount of

management access mandates extraordinary patience on the part of CEOs and CFOs and the

empathy to put themselves in the shoes of potential investors who quite naturally resist making

what they may believe is a hasty decision. Just because a fund manager does not invest in the

company after a one-on-one meeting does not mean the session was not a success. The

manager in question is often simply processing the information that has been disseminated and

carefully weighing the pros and cons against a myriad of possible alternative investments.

Furthermore, there are often times other considerations that weigh into the timing of a buy

decision, such as top-down industry concerns, macroeconomic concerns or valuation concerns.

In such instances, managers want to have all of the due diligence complete so they are ready to

act when they deem these outlier conditions to be optimal.

An important rule of thumb to keep in mind is that it will usually take at least one, preferably

two (from the perspective of the investor), management meetings before a portfolio manager

can summon the confidence necessary to invest in a company – perhaps even three if you

happen to be targeting an investor in one of the Asia-Pacific countries.

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Being transparent when

times are tough goes a

long way and is genuinely

appreciated by the

investment community.

©Rivel Research Group 2012

Transparency

To earn the premium associated with top-notch IR, senior corporate management also must

scrutinize and consider enhancing the quality of the information it allows to be disseminated to

the investment community. After all, no matter how capable the IRO, he/she can only share

company insights and data (and be exceptionally articulate and responsive in delivering it when

requested) that first has been approved from above. The key variable is a willingness to go

beyond simple disclosure and commit to greater transparency in financial communications.

Now, one might wonder what the difference is between

disclosure and transparency. There is a big difference in the

eyes of the investor. Investment professionals define

transparency as clear, unambiguous information through which

companies articulate definitive strategic goals, why they are

important and the drivers governing their achievement. In

essence, it’s the clarity of message that brings forward key

challenges, how they are being addressed and the frank, forthright discussions of the

company’s prospects … in both good times and bad. That last part is quite important given the

macroeconomic and industry challenges that roil the equity markets. Being transparent when

times are tough goes a long way and is genuinely appreciated by the investment community.

On the other hand, investors are becoming wary of disclosure that they perceive to be focused

on providing routine data, metrics, and operating figures on the many facets of the company in

the financial realm. But what they often crave is insight into market share data, product

development, the pipeline, competitive advantages, etc. All too often, disclosure in itself

provides insufficient color or interpretation on management’s part. A company can supply

mountains of data on their operations, but fail to provide any discussion or insight into what it

69%

Mean: 2.3 2.1 2.1 3.1

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“Straightforwardness. I’m getting

tired of hearing spin. I would say an

ability to have an open discussion of

the puts and takes around the

various opportunities on the income

statement – margins, costs,

revenues. I would say an ability to

articulate the long-term plan with

detail.”

—Portfolio manager

“Their ability to answer our

questions thoroughly. The

receptiveness to meet with and talk

with potential investors. And those

individuals that provide information

above and beyond financial

statements. What I mean by that are

presentations, conference calls and

roadshows.”

—Buy-side analyst-

Portfolio manager

“Being candid. I think that is the

number-one thing. To be very

candid with the investors. Not

giving us a line of bull. And not

dodging questions. These are tough

issues these days so there are

tough questions to be answered. If

they are very candid in their

answers, for that they get respect.”

—Buy-side analyst-

Portfolio manager

“If I get transparency from them,

that’s good. Transparency is really,

really big for us. So understanding

what it is that the company does. A

pretty clear presentation on the

future prospects and cost structure

and operating leverage – things

like that.”

—Buy-side analyst

means now or in terms of future performance. They look to the company to provide the “what

does this mean” and the company’s interpretation – lessening the potential for misguided

investment community conjecture. Black is always preferred to gray. For example, how they are

connecting the dots between A and B (A being where they are now and B being where the

company expects to be in the future). Also, it can’t be stressed enough that the key to having

transparent communications is openness, honesty and frankness.

Guidance

The subjects of guidance and transparency are tightly intertwined. A definitive element of

transparency to many on the buy-side is having a company’s own perspective on the future,

how the strategy will play out in terms of financial and operational performance. At the same

time, guidance allows issuers to proactively set the agenda with which a company’s investment

appeal is judged, as opposed to letting others, most notably the sell-side, determine it.

While not all companies supply guidance and many buy-siders can be tolerant about not

receiving this type of forward-looking insight, guidance is often perceived as a critical

distinguishing element of superb IR (of course when done with care, prudence and a keen eye

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To retreat from active engagement

with the investment community will

only serve to fuel rather than diminish

concerns which may, and often are,

blown out of proportion in the

absence of nuanced strategic insight

and prudent guidance.

on not over-promising and under-delivering). Providing guidance is an attribute that can

elevate the investor communications caliber of one company to a notch above that of its peers.

Guidance sets the stage for bolstering the all-

important rating of management credibility (the

single most important driver of investment decisions

over the last decade) through the setting of key

goals, the time frame by which they are expected to

be achieved and the communication of success when

the goals are realized. CEOs who consistently do

what they say they are going to do are the darlings of

the investment community and nicely set the stage

for maximizing the size of their captive audience.

The 2008 market implosion has significantly altered expectations about guidance. It need no

longer be all about earnings. Relative to a set of five types of corporate insight, earnings

guidance actually ranks fifth today. What the investment community is looking for is qualitative

insight on the strategy as well as important operational metrics. When will a new plant be

operational? How much is expected to be spent on R&D? How are you going to execute your

strategy to achieve the goals you have outlined? As the equity markets have churned and the

economy given no signs of strong recovery, investors increasingly have been saying help us to

“connect the dots.”

So while it is difficult to strike a balance between too much information and too little, studies

show that investors do understand the competitive nature of the business and are aware

there’s a fine line there. What they prefer is a sufficient level of disclosure surrounded by a

discussion on what management thinks about it, not volumes upon volumes of filler (read:

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“Refraining from providing any guidance at all [is a problem]. When management has no insight on the

future, that's always a bad sign. It's fine for companies to correct and update the guidance, because I

don't expect 100% precision – no one is superhuman – but they should tell investors what's going on and

why the numbers are moving in a different direction.”

Buy-side analyst

“We're interested in managing for the

long term, and we're adults – there will

be surprises, negatively or positively.”

Portfolio manager

“The mistake is not providing guidance. If a company does

not provide guidance, the Street is completely guessing

and you do not have any idea as to what their earnings

will be.”

Portfolio manager

useless) data. They seek management’s take on the data and how that will translate into future

financial performance. After all, managements theoretically have the best vantage point into

what’s going on in their company and their industry.

The obvious challenge lies in further clarifying future goals without divulging competitive insight,

regardless of whether or not management thinks that what they are giving is adequate. Since the

IR program is almost always viewed as an extension of management, if a company wants that

premium of 10%, then developing a superb IR department means having to provide transparency

in their communications. It’s not necessarily MORE information, but rather, the right information

and the right level of transparency … “This is our strategy, these are the key elements, this is

some detail around those key elements, and this is how we think this will produce future financial

performance.” Without it, companies risk being judged on the poor side, and with the continued

market malaise. Why run that risk when detailed and transparent investor communications are

entirely possible with the right amount of work on the company’s part?

In many respects, this article can be considered a call to action for CEOs and CFOs alike … to work

hard in guarding against marginal proactive outreach during difficult and unpredictable economic

times –rather to consider fortifying IR with additional resources (and a bit more of their own time)

in the function’s perhaps less-than-fully appreciated role of marketing the company’s stock. To

retreat from active engagement with the investment community will only serve to fuel rather than

diminish concerns which may, and often are, blown out of proportion in the absence of nuanced

strategic insight and prudent guidance. The resonance of a company’s investment appeal is in large

part dependent upon repeated exposure to the story, growth drivers and management itself.

Investors clearly need to understand the underpinnings of a company’s success in good times and in

bad, the strategies that will be deployed to soften any downward macroeconomic or industry

pressure and the credibility management brings to bear. At the end of the road is the unique

promise and enhanced valuation implicit in providing “superb” investor relations.