Apr, 2007

Taking control

Web-based targeting technology can serve multiple functions, from identifying current shareholders and targeting new ones to managing investor contacts. At their most primitive, targeting services offer vast databases with contact details of investors around the globe. More advanced platforms pipe in support from analysts, helping IROs whittle down lists of investors that are most likely to be interested in buying their stock.

These services usually have search functions allowing you to target investors according to their investment style, sector, peer group or location.

But the real benefit is the market intelligence that is often rolled in, according to Bill Sherman, global head of data strategy and analytics at Ipreo. ‘You can see the people who currently own you, who has bought and sold, and why they’ve bought and sold,’ he explains. ‘This helps to understand the issues driving the investment decisions and what might cause interest – or lack of it – from investors in the marketplace.’

Most of the products on the market seek to encapsulate investor style through quantitative analysis. The aim is to let companies align their own characteristics with those of their investors. ‘We look at a company’s growth characteristics, top-line growth, bottom-line growth, general valuation, yield, equity leverage, and so on. We then take that investment story and see how it fits into a particular portfolio,’ says Brian Matt, managing director of CapitalBridge.

‘It isn’t an exact science because there’s no way to quantify everything that goes into a portfolio manager’s decision process – but it’s close.’

Some shareholder targeting software can alert you when there is no longer a good fit between your company’s growth patterns and a particular investor’s portfolio style. ‘For example, if you were bought by an institution three performance has led you to a place where you no longer fit with that investor, the IRO needs to know,’ Sherman says.

New destinations
Targeting software can be especially useful when hitting a new roadshow destination. ‘During roadshow season I spend about 30 percent to 40 percent of my time on the system looking at data and downloading briefing notes,’ comments one IRO.

‘I think it’s well worth my time if I’m going to visit, say, San Francisco or Chicago to make sure that I know who my targets are in that city before I go,’ says Mickey Foster, IRO at FedEx. ‘Some products also allow you to preempt the kind of questioning you might get at a given meeting by showing you the questions that were recently asked on competitors’ conference calls with investors.’

Foster is a heavy user of the screening tools in his Thomson Financial system. ‘The most useful facility on my targeting software is the one that allows me to find out what the purchasing power is for the particular target and then match my company up to the characteristics of various portfolio managers,’ he says. ‘Even if an investment bank is taking me to meet investors, I would always make sure it knows that I would like to see investors from my targeting studies and not necessarily its own clients.’

Richard Davies, head of IR firm RD:IR in London, agrees targeting tools can help IROs be more proactive. ‘Most people rely on brokers to find investors that don’t own their stock, and that’s a huge mistake,’ he says. ‘It means lots of firms end up being taken by their broker to meet hedge fund after hedge fund.’

The importance of engaging with new shareholders cannot be stressed enough, thinks Christine Berg from Thomson. ‘Proactivity and direct contact between existing and potential investors and the corporation is critical in the investment decision process,’ she asserts.

But only a minority of companies take a proactive, self-directed approach to targeting, according to Davies. ‘We know of some major firms that have quite diverse share ownership but still haven’t met some significant fund managers,’ he notes. ‘That’s because the brokers never take the companies to see them.’

Preaching to the unconverted
Not everyone is keen on targeting software, however. Peter Campbell, director of IR at French software company Bull, is skeptical. ‘The weakness of targeting is in the data, which is often old and has too few providers,’ he says. He favors having ‘good relationships with brokers and investors, a well-designed web site and good disclosure over paying €20,000 to a service provider with no guarantees at all.’

Another IRO comments: ‘If you know the institutional market well and you’ve been doing IR for a long time, you know where the money is.’ But Ed Curtin, vice president of intelligence and outreach services at Shareholder.com, defends targeting services. ‘The players change so frequently that even the most experienced IR professional needs the use years ago and your particular of the database,’ he says.

As IROs become savvier, competition for the ‘right’ kind of investors will become fiercer. ‘Technology makes the job of being up to date and knowledgeable more of a necessity simply because you have many more factions competing for the same capital,’ Sherman points out. ‘If you’re not up to date, it’s going to make your ability to achieve proper valuation more difficult.’

Perhaps the most common targeting method is to look for investors that own other companies with a similar investment profile to your own. But Brendan Fitzpatrick, founder of BuysideIQ, warns against such simple peer analysis. ‘A company might look at Fidelity and say, It owns all my peers. But that’s no surprise because Fidelity basically owns the entire market,’ he points out. He thinks a reliance on peer analysis is a fundamental weakness of many of the big targeting software providers, which means ‘all the companies just end up talking to the same investors.’

Defenders of peer analysis argue that it must be understood as more than just looking at other companies in the same industry. ‘When I talk about peer groups, I don’t just mean industry peer groups; I might mean story peer groups or growth peers, and these can be very useful tools for analysis,’ Sherman says.

Small and overlooked
There is another problem, however: peer targeting is often biased toward portfolios that own a lot of stocks, so many companies ignore smaller investors. In such cases, Fitzpatrick thinks it’s important to distinguish between equity under management (EUM) and purchasing power. ‘A firm with a relatively low EUM can often take a bigger position in a company than an investor with a much larger EUM,’ he argues.

IR professionals warn that a targeting product is no silver bullet. ‘We probably use these products to identify only about 10 percent of the investors we invite to meetings because a lot of our investor contacts have been built up over the years,’ explains Aaron Hoffman, IRO at Sara Lee, adding that software may be more beneficial to smaller companies or IROs with less experience.

Curtin agrees: ‘Larger companies have more established lists and greater visibility, whereas small and mid-cap firms need more visibility and exposure.’ Davies also agrees small caps need targeting tools more than their bigger counterparts. ‘If you’re a small-cap company, very little is done for you by brokers,’ he says. ‘Many are left hanging out to dry.’

Matt, however, sees merits for both large and small firms. ‘Targeting is so different for so many different kinds of companies,’ he says. ‘With small caps you’re trying to raise the profile of a company while with large caps you are trying to find new pools of liquidity. Targeting is equally useful for both.’

Targeting technology can be an important addition to any IRO’s armory. It can help seek out new investor contacts prior to roadshows, or even improve a smallcap company’s chance of getting sell-side coverage. And even the most experienced IRO may be able to benefit from targeting products that help seek out niche institutional investors to provide a measure of liquidity in their investor base.