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Dear Friends and Clients.
About two weeks ago, The New York Times had a front page story entitled "Can't Grasp Credit Crisis? Join the Club" and I felt better. I thought I was the only one who didn't really see what happened, what was going to happen and how it would likely affect you as my client, and even me as an investor. After all, my job is to assist you in maintaining a credible and transparent relationship with investors and journalists. Given the volatility and widespread pessimism almost everywhere I looked, I felt abashed at encouraging you to sustain this continued accessible posture towards the capital markets.
In looking at recent volatility and fear in the markets (when Bear Stearns was being sold temporarily for $2 per share and the Fed took its boldest actions since the Great Depression to stabilize the markets), it was easy to want to hide. Lately, we have reason for more optimism, at least as US capital markets and interest rates appear positioned in relationship with global trends. Commodities have begun to decline, JPMorgan upped its price for Bear by 5 times to $10 per share and Lehman Brothers' convertible preferred offering was very well received.
So what does that mean as we look at our communications policies in the context of the global investing backdrop? First, let's get a handle on what really did happen and why it was so difficult for many to understand. As the Times reporter wrote "he emerged thinking that all the uncertainty has created a panic that is partly unfounded," and that in a nutshell, is a major culprit. One financial markets expert, Hyman P. Minsky, (who actually passed away in 1996) constructed an instructive five stage model of the credit cycle which I believe simply and clearly explains what the financial markets are going through today. According to Jack Cassidy of The New Yorker, Minsky's five stages of the credit cycle were displacement, boom, euphoria, profit taking and panic. The failure in July 2007 of two Bear Stearns hedge funds who were big investors in mortgage securities was probably the beginning of the panic stage. "Six months and four interest-rate cuts later, Ben Bernanke and his colleagues at the Fed are struggling to contain the bust."
One big consideration for all companies communicating with the financial markets in this sometimes frightening time is that investor and media perceptions have perhaps never been more important. George Anders in The Wall Street Journal asked if Bear Stearns could have done more to avert its meltdown. He focused on the appearance on CNBC of Bear Stearns' CEO and with the help of an informal panel, critiqued the CEOs appearance. Anders notes that Lehman Brothers seems to have learned from its own experience ten years ago when rumors cropped up after the collapse of Long-Term Capital Management. "Hundreds of the firm's top managers have been given detailed talking points to reassure customers about the firm's finances. ("Business: Was Another Ending Possible for Bear? The Wall Street Journal, March 19, 2008) While Bear Stearns may be an extreme case, any publicly-traded firm needs to recognize that in the current environment, investors and journalists may "shoot first and ask questions later!"
In terms of more quantitative indicators, The Fed cut its main rate, the federal funds rate, by 75 basis points to 2.25 percent about two weeks ago, the dollar ended the 1st quarter down 7.5 percent against the euro, and the S&P 500 has fallen about 7 percent year to date. The good news, as I see it, is that the tide is going to turn, partly because Europe will have to reduce their interest rates. European interest rate cuts will cause the dollar to strengthen and investors will begin to look at good old fundamentals.
There are numerous sectors and many economies which will likely benefit in the next year. I am not an investment strategist so I won't try to predict which, but I do feel certain that there will be sector rotations and that we have probably seen the bottom with the dollar and certainly close to a bottom with rates. So from a communications perspective, I think managements should take the approach outlined below--particularly in light of year-end earnings and the need to provide perspective on what is reasonable in the current forecast. This is the time of year when managements speak most loudly to their financial audiences with guidance and there are numerous conferences and opportunities to educate and inform the investing public.
Suggested Approach
1. Despite uncertainty because of the recent volatility, don't hide. Also don't make unrealistic promises, but address the challenges and opportunities that you see affecting your company, industry and geography, and keep investors updated via releases, face-to-face meetings through non-deal roadshows, and brokerage/investor conferences. Conferences are excellent venues to meet large numbers of investors in a short period of time.
2. Keep the message simple. None of us are smart or lucky enough to identify a market bottom or top. Investors want to know how you will manage your business in the current environment, and would like to be aware of the options available to you if the economy weakens further. Your competitive positioning is also very important to investors. Certainly the dollar's weakness, commodities' strength and geographic uncertainty should be addressed in terms of how it affects your company.
3. Do updated targeting and be creative. Most companies just target their industry peers. The opportunity is to look beyond the traditional approaches. Some companies are also value plays; dividend yield plays; growth stock stories, etc. There is an opportunity to tell your story to the widest possible audience both in the US and abroad.
4. If you have news flow, try to utilize the press. This is always a risk reward proposition. To be sure, we can't control what journalists print. And, as I've said many times, we can believe half of what we read, and we don't know which half. But, the media has a long arm and we find that stories that get good coverage – whether positive or not so positive – generate large increases in volume and sometimes valuation on the days they are picked up.
5. Don't wait for sell side analysts. They are fewer in number; they tend to be hesitant to make investment conclusions particularly in light of this market, and most buy-side funds do their own research. Find a way to meet the buy-side even if you don't have sell-side research coverage. This is something firms like ours spend a great deal of time organizing.
6. Make sure your website and collaterals are current. Many investors immediately look at the corporate web site before meeting company managements.
7. Update your presentations to incorporate your strengths but realistically address the current challenges and how you are prepared to implement plans if circumstances markedly change. Presentations are an excellent way to tell your story and they should be included and updated as part of the web site information.
8. Do feedback and perception work. Don't assume you know what investors think. Even if you do and are correct in your assumptions, it's good to have written documentation to share with senior management, as well as your board of directors. And, believe it or not, investors and analysts appreciate the opportunity to offer feedback and to know you are listening to their assessments, ideas and concerns.
9. We are truly a global marketplace. What happens in China, India or Brazil affects the rest of the world, as does US politics and economics. Therefore be knowledgeable and be able to communicate relevant macroeconomic/big picture events as they are likely to impact on your own business.
10. Crisis management. As The Wall Street Journal article I mentioned above about Bear Stearns on CNBC suggests, effective crisis management can certainly matter a great deal. Have a plan in place and consider new or additional media training.
We at Global are doing more for clients around the globe in more countries than ever before. We are hosting field trips in China and India and Russia and Brazil.
We are setting up non-deal roadshows with firms that traditionally don't cover your stories, and getting companies to present at conferences to meet new investors.
There is money sitting on the sidelines, more than in a long time because of the weakness, and this is an opportunity for you. It will be invested; it's just a question of when.
Hope this is helpful and we look forward to talking with you all many times during the year.
All the best,
Anne McBride
Vice Chairman
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Todd Gerlough
Director of Research
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