IndustryInsights

Last fall was the Credit Crunch, the Fall of Lehman Brothers, the Financial Meltdown, and the Great Recession. We in investor relations set aside our rosy growth projections. We talked about liquidity, leverage, sustainability and, most critically, survivability.

Those topics still matter a lot. But this fall’s imperative is broader. Equities are back. Upsides have an audience. After a year like the last one, it’s a once-burned-twice-shy audience; it wants its information framed differently. So, new messaging. New metrics. Last year’s pressures reshaped communications channels, too. So, new approaches to execution.

First, the context: The Dow is up. Corporations have been quietly but substantially raising new capital in the equity markets. Substantial mergers and acquisitions are being announced, and the pipeline actually contains a meaningful volume of future prospects. And not just those emerging from bankruptcies, restructurings and bank seizures. There are multiple signs of life in initial public offerings. Private equity, a key element in value realization, is similarly resurgent, taking a role in restructurings, consolidations, cash-driven M&A, and more.

Among major money managers, we’re seeing asset allocators hiking the percentage allocated to equities. Long/ short equity managers are more long, less short. Sector rotators are looking past defensives and counter-cyclicals toward high tech and health care, among others. The emphasis is value, not growth (perhaps because the market has taken such a beating that nearly everything’s a value investment).

Growth expectations are conditional. The high-growthhigh- risk-high-return mantra of 2007 has little traction today. The financial sector isn’t yet finished purging bad news off its balance sheets. The general economy’s recovery is still looking for a not-yet-evident resurgence of consumer activity. Is another downturn in the offing? Is inflation just over the horizon?

Conditional expectations mean: What are you going to look like when the Great Recession finally ends? Can you grow? Generate an attractive profit? Create value for shareholders? What’s your plan? These are the themes many investors are now ready to hear. But they also still want to hear about leverage and liquidity and all those survivability topics, because the Great Recession may not be ending right away. The best credible storyline: “We’re winners if recovery continues, survivors if it doesn’t.”

Recurring revenue streams are a metric of choice for this storyline. Consistency of performance is much prized. Recurring revenues suggest growth potential and margin improvement in an upturn. They also suggest bills will be paid, payrolls met, debt amortized in a downturn. Speculative revenues can still be sexy when attached to the right story, but they’re often severely discounted. Also in demand: Non-GAAP indicators of progress, to answer the question “How can I tell your plan is working?”

The 2009 Investor Message isn’t necessarily going to travel well through the 2007 Communications Channels. Those channels have changed, too. Traditional financial journalism has contracted painfully, a victim of both recession-driven advertising cutbacks and intensified competition from electronic news and information services. Shrunken reporting staffs compete for eyeballs via headlines-delivered-very-quickly. Big news gets big space. Bad news gets big space. There’s not a lot of room for “company does pretty well with intelligent, boring strategy.”

Sell-side analysts aren’t as likely to be helpful conduits either. A decade ago many were criticized for close ties to their firms’ investment banking departments. With investment banking largely sidelined since the summer of 2008, many sell-siders have become linked to their firm’s trading floors — where trading volume drives bonuses, and shortterm investors, notably some hedge funds, drive trading volume. Trading-floor-tied analysts are less interested in next-year stories than in “catalysts.” These, for traders, are events that trigger very-near-term trading volume; for high-turnover hedge funds, they are events that trigger very-near-term price changes.

A day-trader won’t hold shares for long; he has little need to talk to a company in any depth. A hedge fund with a 90-day horizon will interrogate for catalysts likely in the coming quarter, hoping to tease out the rationale for an investment decision. But — even more than in the past — an investor who considers holding shares for a year, or ten, will want to know well what he’s committing himself to. And this sales process takes considerable time. The getting- to-know-you process can take six months and three meetings, including a face-to-face at his place, and later, another one at the company’s. Even if your sector hasn’t quite turned around, the time is now to begin the dialog.

At a recent investor conference hosted by a bulge-bracket brokerage, presentations fell into three groups. One group did vintage-2006 “introduction to our company”; some investors walked out midway through. A second group combined “introduction to...” with heavy detail on weathering the Credit Crunch; investors stuck around, but said they’d heard reasons not-to-sell, rather than reasons-toown. The third group breezed past the basic introduction and gave equal billing to weathering the Crunch and “Prepping for Recovery and How to be a Beneficiary when Growth Returns.” This group got lively questioning and requests for ad hoc one-on-one followups.

What to do in this environment?

First, refresh your story. That vintage-2006 “introduction to our company” won’t get you far today. Assume investors already know what’s on your web site (they do). Tell them what your long-term strategy is, and how it’s changed in the past year. Position yourself versus your competitors. Point out secular trends that help (and those that hurt, too; honesty counts). Say what you’re doing now that will pay off when the upturn gains momentum. Get realistic about the kinds of returns investors should be thinking about when things stabilize.

Second, tell your story yourself. You can count on fewer and fewer other people to do it for you. It’s understandable that companies are reluctant to talk about themselves the way investors do — magnitude, timing, likelihood and currency of expected return — but it’s remarkable how few of them provide investors with enough raw material to reach their own conclusions. We still find face-to-face situations are the most effective way to persuade. But today you need also to make sure your story is well reflected on your web site — like it or not, that’s the default first stop for all investors.

Third, a few friends remain; use them. In every industry, there are still a few journalists who report substance rather than flash; a couple of analysts with real understanding and insight; the occasional blogger who contributes constructively to the dialogue. Cultivate them. As for the others, even a so-so journalist will write your story if it’s effectively constructed; even a second-tier analyst will introduce you to your target investors if he gets to include some of his best customers as well.

Fourth, and arguably most important, get into people’s faces. No one alive can keep up with the flood of incoming electronic communication; no one alive can access all the information that’s out there to be searched. In a time of data overload, it’s human contact that gives the confidence to check out a new prospect, agree to the first meeting, and so on down the path to making a sale. There are a lot of ways to do this. They all take time. But, as our fragile economy inches back on track (we hope), time is one thing we actually may have some of.

To discuss this article further please contact James MacGregor (jtm@abmac.com) or Lex Suvanto (lex@abmac.com) at The Abernathy MacGregor Group.