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M&A clichés don’t ring true

June 15, 2009 – 10:36 pm

Examples abound of acquisitions that ultimately fail to benefit shareholders, and the wipeout in market values since 2007 has provided lots of new case studies. Exposure of deals-gone-bad serves as a cautionary tale for people who write merger announcements: Too often, standard M&A clichés don’t ring true.

One case in point – the 2006 acquisition of apparel retailer J. Jill by Talbots – is Michelle Leder’s subject in “On M&A Math,” published June 9 at Footnoted.org, a blog dedicated to digging up and highlighting glitches in company disclosures. Talbot’s bought J. Jill for $517 million three years ago. Last week, Talbots said it was selling J. Jill to a private equity group for just $75 million, about 85% less.

Leder writes:

Whenever a deal is announced — and a bunch of them have been lately — there’s the inevitable press release that talks about synergies and how the deal is going to enhance shareholder value. Indeed, that’s pretty much a mandatory sentence. But things don’t always turn out as planned when it comes to M&A, or, quite frankly a lot of other things …

In the February 2006 release on the retailers linking up, the Talbots CEO used several M&A bromides:

Working together, we expect to capture the significant growth potential of the J. Jill brand and enhance shareholder value. We believe our proven expertise in managing a complex multi-channel operation will enable us to maximize the cost synergies of our similar business models, particularly in back-office functions.

In the June 2009 exit announcement, a different Talbots CEO declares:

This is a significant strategic step forward for Talbots as it enables us to focus our time, resources and attention exclusively on rejuvenating our core Talbots brand and return to profitable growth.

Synergy. Shareholder value. Growth potential. Expertise in managing complex operations. It’s too bad when these things come to naught. Of course, the financial crisis and recession have overcome many companies that didn’t merge, too.

But it seems to me that investor relations professionals should learn something from witnessing the wreckage of various mergers in recent years. We should anchor our statements about M&A transactions in specifics, not the traditional broad-brush claims of reaping synergies and enhancing shareholder value.

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged Investor Relations, M&A, Recession | Comments Off

More scary Washington stuff

June 10, 2009 – 1:44 pm

Harvey Pitt, who was chairman of the Securities and Exchange Commission early in the Bush Administration, said Tuesday on a panel at the National Investor Relations Institute 2009 Annual Conference in South Florida:

Sarbanes Oxley was just the tip of the iceberg. We are federalizing the law of corporations. Companies that don’t get that are going to be left behind.

Pitt, now CEO of Kalorama Partners (a Washington-based consulting firm on business and government issues), said Congress and the SEC under the Obama Administration are dramatically changing the regulatory landscape for companies.

For example, shareholder proxy rights and board of director relationships to companies have traditionally been governed by state corporation laws but Congress now is likely to pass new laws on both, Pitt said. The “emotional and moral outrage” on extravagant compensation by companies getting federal aid also will lead to legislation – and it won’t be limited to bailout beneficiaries – he said.

Unfortunately, Congress when it legislates tends to wait for a thalidomide case – and we clearly qualify for that now [with the financial crisis] – and then tends to over-legislate.

Pitt’s advice: Public companies and boards should proactively address executive pay policy to bar large packages when companies are failing, “shareholder democracy” issues such as access to make proxy proposals, and other governance matters.

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged Governance, Investor Relations, Regulation, SEC | Comments Off

DC to IR: “Here we come”

June 8, 2009 – 11:29 am

Public companies will face tougher laws and increasing regulatory scrutiny from Washington in the coming year, warns Jeff Morgan, president and CEO of the National Investor Relations Institute (NIRI).

In a panel on advocacy at the NIRI 2009 Annual Conference today, Morgan said the Securities and Exchange Commission (SEC) is pursuing three priorities for 2009:

Enforcement of existing rules such as Regulation FD
Investor protection & corporate governance
Transparency of financial markets & products

“The landscape is changing and will continue to change … It’s a whole new world,” Morgan said. With the change agenda of the Obama Administration influencing all areas of regulation, companies should evaluate their IR practices with care – and join in advocating for balanced, sensible policies - he said.

From the SEC, Morgan said, we can expect to see enforcement cases in the next year centered on Regulation FD issues of selective vs. broad disclosure.

“We’ve been in an environment where we’ve never seen a lot of Reg FD cases come against companies,” Morgan said. The rapid growth of social media poses a challenge to traditional controls on corporate disclosures, he noted. “If we start to see [Reg FD enforcement actions], I think it’s going to cause all of us in a corporate environment to be asking how do we manage that better.”

Change is coming in the proxy area, too. Both the SEC “proxy access” proposal and elimination of broker voting for passive shares are likely to give more power to activist shareholders and pose challenges for companies, he said.

Morgan said the SEC also is looking at requiring enhanced disclosures on board of directors’ leadership approach, board nominations, compensation philosophy and practices, and perhaps nonfinancial factors such as climate-change impacts.

Transparency has been a theme for President Obama from the start. As the idea takes shape in legislation and new regulations, it may benefit IR people looking for more insight into hedge funds and less-regulated areas of the investment markets, but it will mean more demands on public companies, too, Morgan said.

“Corporate transparency is big on Congress’s agenda,” the NIRI president said.

So DC is saying to IR, “Here we come!” And I would add, “Watch out!”

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged Governance, Investor Relations, Regulation, SEC, transparency | Comments Off

Sell side shrinks, IR task grows

June 2, 2009 – 5:00 am

The shrinking sell side poses a big challenge to public companies, forcing management to get out more and pitch investors directly, says Michael Mayhew, co-founder of Integrity Research Associates, which studies securities analysts and advises institutions which ones to use for various investment themes.

The universe of analysts has been hit hard by Wall Street layoffs, the demise of Bear Stearns and Lehman, and distressed mergers of big I-banks, Mayhew blogs in a June 1 post.

From September 2008 to mid-May, he quotes FactSet as saying, 26% of all sell side reports on small cap companies were announcing dropped coverage. Withdrawal of coverage accounted for 17% of all mid cap reports and 16% of large cap reports.

Mayhew also cites an academic study that found an individual stock that loses analysts typically underperforms its industry for 12 months following the dropped coverage, then recovers and outperforms in the second 12 months.

The loss of coverage both deprives buy side investors of research and hurts public companies themselves, Mayhew says:

The result of this trend has been that many companies have been orphaned, losing some if not all of their research coverage. If history is a guide, the stock price of these public companies is likely to underperform their peers, at least over the short-term. This will force many company executives to increase the amount of time they spend meeting with investors to tell their companies’ stories.

Investor relations professionals still must cultivate sell side analysts, as well as seeking out independent research firms (ones that work for investors, not the pay-to-play shops). And more than ever, companies need to go direct to the buy side.

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged buy side, financial crisis, Investor Relations, Sell side | Comments Off

Majority still offer guidance

May 19, 2009 – 8:52 pm

Despite the wild economic ride we’re on, most companies haven’t stopped providing forward-looking guidance on earnings, according to a survey by the National Investor Relations Institute.

In an Executive Alert published May 18, NIRI says the practice of guidance continues to decline – but not very fast:

One might assume that the recent dramatic economic decline would necessarily result in a meaningful decline of public company guidance. Counterintuitively, NIRI member respondents have not abandoned guidance in large numbers.

A few highlights from the 2009 survey of 515 NIRI members:

60% say they do provide earnings guidance, down from 64% a year ago. The ranges companies provide are wider amid economic uncertainties.

50% of the companies offer guidance on revenues, also down a bit.

Guidance on annual expectations is most popular, with quarterly updates.

The most common reason for offering guidance is as a way to keep sell-side expectations in line with what seems reasonable to companies.

My own feeling is that the decision “To guide or not to guide?” is individual to each company. The answer depends on needs of your investors, comfort level of your management and board, predictability of your business and so on. In some cases, offering qualitative or quantitative views on earnings drivers such as trends in key markets in which you compete may be as useful as an EPS range.

A company’s policy on guidance, NIRI suggests, should include decisions on metrics that management wants to give forward-looking information on, time frames for that guidance (annual, quarterly, monthly), and frequency of communicating guidance. NIRI also offers links to supplemental information for members (see the Executive Alert).

So there it is – some guidance on guidance.

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged earnings, Forecasting, Guidance, Investor Relations, Sell side | Comments Off

Benchmarking the best: II on IR

April 29, 2009 – 4:51 pm

When the going gets tough, the best companies get going – to communicate more than ever with shareholders and analysts – according to Institutional Investor’s ranking of “America’s Best Investor Relations.”

The article in the magazine’s April 2009 issue is worth reading, but IR folks who want to benchmark against the “best” should go online and explore II’s interactive rankings page. It’s a clunky interface, but you can find your industry among the 54 sectors covered.

The magazine polled more than 650 portfolio managers and buy side analysts, along with 400 sell side analysts, to compile its review of winning IR. Some examples of championship efforts cited by II:

With volatile currency exchange rates hitting many companies’ earnings, MasterCard and McDonald’s won kudos for providing extra data on the impacts, such as income and expense sensitivity to the dollar-euro rate.
In a scary time for airlines, Continental “soared above its competitors by being open and giving detailed information not provided by others in the sector” – e.g., monthly projections of revenue growth and jet fuel costs. The IRO also says investors appreciate predictability – like being able to count on seeing Continental’s traffic report on the first business day of each month.
When Coca-Cola Co. and its largest bottler had a run-in over pricing, KO launched a two-stage outreach – contacting top shareholders and influencers to answer rumors and concerns, then following up with a broad communication effort on how the two companies work together.
With the recession pinching casinos, slot machine maker WMS Industries emphasizes “being much more visible” by meeting personally with investors and analysts. WMS’ IRO says he’s on the road twice as much now as at the start of 2008.

Bottom line, professional investors are working harder than ever to eke out returns. To cultivate long-term relationships, IR people and the companies we serve must go the extra mile to help investors analyze and understand this challenging time.

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged Crisis communication, institutional investors, Investor Relations, Recession | Comments Off

Gag rule for bankers

April 10, 2009 – 4:15 pm

Well, so much for transparency and all that. Now it seems the Federal Reserve is telling 19 of the nation’s largest banks not to disclose how they’ve done on the Obama administration’s vaunted “stress tests” (read AP story or Bloomberg).

With earnings season and conference calls upon us, bank CEOs and CFOs might face questions from investors: Does the government think you’re going to survive – or not? Does a rigorous look by regulators show the bank is healthy, or heading back to the Bailout Window?

Mum’s the word, the Fed decrees. Only the government is allowed to disclose the outcome of the stress tests – which it is supposed to do by the end of April.

As AP tells it, the Fed is protecting weak banks against panic if executives of the healthy institutions let the cat out of the bag:

The order was the latest in a series of government moves designed to keep good news about strong banks from dooming others to a downward spiral of falling share prices and financial weakness. If banks receiving the highest marks trumpet their results, the fear is investors might push down share prices of those companies that make no such announcements.

After Wells Fargo surprised investors with good earnings on Thursday, CFO Howard Atkins declined to talk about the government’s tests. “We haven’t commented on regulatory matters and we won’t start now,” Atkins said [to Bloomberg]. “We don’t comment on the process.”

The gag rule seems a little Orwellian coming from folks who champion “transparency.” For those of us brought up on efficient markets, open disclosure and so on, it’s an ethical imperative to tell investors about material information in a timely way.

But, then, if the government is going to control the big banks, the big banks are going to be – well, controlled by the government. Sssshhhhhh!

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged Banking, disclosure, financial crisis, Investor Relations, transparency | Comments Off

Get ready for new regulation

April 6, 2009 – 9:50 pm

Wondering what new wave of regulation is coming our way? Chairman Mary Schapiro of the Securities and Exchange Commission today offered an outline in a speech to the Council of Institutional Investors.

Schapiro’s agenda for the SEC in 2009 includes proposals for new disclosure requirements, proxy and compensation changes, and other ideas that investor relations teams will want to watch closely.

The initiatives will focus on strengthening the hand of shareholders in electing boards of directors and holding them accountable:

In May, the SEC will consider a proxy access regulation to ensure that shareholders “have a meaningful opportunity to nominate directors.” Details to come, but one option was considered before. As MarketWatch reports: “A similar approach was introduced by ex-SEC Chairman William Donaldson in 2003, however it was never approved. Labor-backed investors and activist hedge funds have pushed for the authority; however corporations have opposed it arguing that investors with special interests such as labor unions would push their agenda at the expense of the company’s effort to improve share-value.”
The SEC will consider requiring more disclosure on board nominees – data on a candidate’s experience, qualifications and skills, beyond the current brief description of recent experience.
The Commission may require boards to disclose reasons for using a particular leadership structure — such as an independent chair, non-independent chair, or combined CEO and chairmanship.
Schapiro will seek more compensation disclosure, such as how executive pay drives management’s behavior, including risk-taking. She also wants companies to explain their overall comp approach, beyond highest-paid officers, and reveal consultants’ conflicts of interest.
In risk management, the chairman has asked the staff to develop a proposal “that looks to providing investors, and the market, with better insight into how each company and each board addresses these vital tasks.”

In addition, the SEC tomorrow will consider alternatives for limiting short selling – a thorn in the financial side for some companies and IR teams.

The devil is always in the details, and regulatory expansions can be especially devilish when they spring from political outcry. The media are describing the public’s current attitude, especially in Washington, as a “rage” brought on by bear-market investor losses and corporate scandals.

No doubt, securities lawyers will continue to have plenty of work ahead. IR practitioners should keep an eye on the SEC to prepare for what’s coming.

By Dick Johnson | Posted in IR trends & news, Industry Blogs, Investor Relations | Tagged disclosure, Governance, Investor Relations, Risk, SEC | Comments Off

Who’s most shareholder-friendly?

March 24, 2009 – 7:35 pm

The March 2009 Institutional Investor is a must-read for IROs.

The names of top-ranked firms in 57 industries are reason enough to take a look at “America’s Most Shareholder Friendly Companies,” an II ranking based on relationship evaluations by 675 buy side analysts and portfolio managers. Yes, the list includes some of the market’s longtime “blue chips,” but also a few you might not have considered.

You can check rankings in your industry here for a mini-benchmarking.

But the common themes among top-ranked companies are even more compelling. Beyond working hard on delivering fundamentals amid a tough economy, managements are focusing more than ever on relationships with their investors. Here’s a sampler.

Southwest Airlines:

“Any time that circumstances are difficult, it puts that much more stress on providing the right information,” [CEO Gary Kelly] says. “We work hard to establish a baseline understanding of Southwest Airlines’ vision and who we are, and we do the best we can to set reasonable expectations.”

Baxter International:

“The thirst for information from investors has grown significantly over the past 12 months,” says Mary Kay Ladone, vice president of investor relations. The challenge, she explains, is trying to find the right balance between “delivering a simple message that allows shareholders to make investment decisions, but not simplifying the message to the extent that we mask some of the uncertainty. This has always been the case, but the current environment has heightened it.”

… she adheres to five basic principles when communicating with shareholders and potential investors: “simple, transparent, responsive, timely and accurate.”

Kimberly-Clark:

[CEO Thomas] Falk and his investor relations team keep shareholders informed of developments - even when the news is not good - by scheduling regular meetings in the offices of buy-side analysts in major markets and by making themselves available to answer questions. ”Good investors are always probing for the soft spots in your strategy and your deliveries,” he says. “They have done their homework.”

Procter & Gamble:

“At the heart of our investor relations approach is the clear understanding that our shareholders are the owners of the company and that we need to be pro-actively responsive to them,” [CFO Jon Moeller] says, adding that P&G hosts investor meetings eight times a year at its headquarters and also attends most major investor conferences. “We make sure they understand our strategy, how we’re competitively advantaged and how we’re building on that.”

You might say it comes down to basics. Companies that execute well on the fundamentals of investor relations - clear communication of strategy, timely disclosure of changes and generous access for shareholders - earn favor and loyalty from the buy side.

And those relationships pay off in an uncertain era.

By Dick Johnson | Posted in Financial communication, IR trends & news, Industry Blogs, Investor Relations | Tagged Bear market, institutional investors, Investor Relations | Comments Off

Say it ain’t so, Jack

March 13, 2009 – 5:39 pm

Jack Welch, the longtime CEO of General Electric whose personal and corporate brands were synonymous with growing shareholder value in the Eighties and Nineties, is backpedaling now … big-time. There he is on Page 1 of today’s Financial Times.

The newspaper quotes Welch in a series on the future of capitalism:

“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers and your products.”

Well. Not shareholders? The dumbest idea? We’re all wondering …

Was Welch drugged or tortured by Soviet agents? No, wait a minute, the evil empire fell long ago while Welch was still delivering regular-as-clockwork increases in profits - to the delight of GE shareholders.

So what has come over Welch? The Financial Times positions his blast at shareholder value as an executive spurning short-termism. FT lumps a quarterly earnings obsession together the drive to improve share price.

Surely Welch is right that strategy is long-term and has to do with a company’s customers, product mix, competitive approach, investment in the future, etc.

But preserving and building value seems fundamental to the mission, aspiration, even raison d’être of a company. A corporation is essentially a trust between owners and their stewards. Shareholder value is part of most CEOs’ pay structure. And rightly so, I believe.

Of course, companies usually emphasize pursuit of long-term shareholder value. Investor relations is largely about explaining that pursuit to investors. OK, we can talk about fighting short-termism.

But, Jack Welch or not, I wouldn’t recommend adding ”Shareholder value is the dumbest idea in the world” as a message point in your annual report or road-show presentation. Not today, not ever.

Anyone want to venture a comment on Welch’s statement?