Being a CFO and other topics

Not just finance, hobbies too ....

Tag: Investor relations

Share Buybacks

By

On June 28, 2016

In Cash Flow, CFO, Investor Relations, Working With Investment Banks

Share buybacks are simple to explain. It is when the company buys (and hopefully cancels) shares that they have previously issued. The effect is to reduce shares outstanding and thus reduce dilution Andor creates additional demand for the stock while the buyback is in progress through the actual shares being purchased and potentially through a halo effect that the message that the company is buying shares can have on investor psychology and their desire to purchase shares.

The jury is always mixed on share repurchases. In general, they seem to happen more in good times when stock prices are high and seem to be greatly reduced when prices are low. There is no permanence to them. Unlike dividends, share buybacks are always announced as one time transactions with a budget and no promise that more will happen. This give management more flexibility but also gives no real promises to shareholders. Indeed, the actual buyback can be announced but never actually carried out. This is generally not by intent, sometimes there are maximum prices set and the stock moves above that price and nothing is transacted. But it is always possible that the maximum price was set with the intent that little to no stock would be purchased.

There is even a view that the last few years of stock market performance would have been flat without the demand caused by many large buyback programs. These programs also have been a source of supply for the debt markets as some companies borrow to repurchase shares. This makes some sense if much of your cash is overseas and repatriating the cash will cause a big tax bill. Plus the interest paid is tax deductible.

Before I discuss when and how I think you should do a stock buyback, there are plenty of times you should not. The market goes up and down and the same for all stocks. Eventually your stock will go down and if your stock has a fairly high beta, it may go down sharply. When that happens, there will be people that start demanding a buyback, often using the argument that if the company believes in itself, then it should show it by buying the stock. This is a terrible reason to do a buyback. Reacting to short term movements in your share price buy committing to a buyback does not show strength or belief in your company. If you did, you would be confident that the price will recover based on future results rewarding long term holders. Overreacting shows weakness, not strength.

I will be clear on my personal opinion. I think that buybacks have merit but are not often the best choice. I think for most growth or early stage companies they are pretty much always the wrong choice as normally you do not have excess cash and it is much better to spend your cash on internal growth rather than repurchasing shares.

As a general rule, if your share price is low for some reason and you have enough cash to consider a buyback, then first consider any convertible bonds you have outstanding. You might be able to retire debt at below the $1 face value of the bond (which should generate an income statement gain at the same time you are reducing debt) and reduce dilution at the same time. Bonds use the “if converted” method and often are dilutive even if not in the money.

Then, if you have cash on hand that exceeds what you can reasonably use to improve returns of the business and you are not sure it will be recurring well into the future (dividend might be better in that case), you can look at doing a buyback. You should look at the quality of suggestions on where to spend your cash, usually there are only so many good opportunities in front of you and if the quality drops too much and you are not willing to go outside of your existing business lines, then a buyback could make sense. A buyback can also help protect against activist investors. If you let too much cash pile up without doing anything with it, then you can attract activist attention and that is very distracting if it happens.

You will need Board approval to get a buyback done, so you will need to have good arguments prepared. Buybacks can be an emotional issue, so be prepared for some emotional pushback that is not connected to the raw numbers. You also will need a brokerage account and to negotiate the cost of the buy-out. Opening an account can take a little while because of the know your customer rules the banks need to follow. The cost to buy the shares should be pretty small, there are large market makers that do it for pennies on a share, but no real relationship benefit, or you can pay a little more and use one of your investment banks. Shop around a little, it can be much less expensive than you think.

Consult with your lawyers, but you typically cannot start a buyback if you have material, non-public information. That means that you need to commence it during an open window. You can set the share repurchase on autopilot as long as you do not touch it when your window is closed. Normally you do a formal plan where you instruct the broker to buy a certain amount at set prices and they execute. During an open window you can give individual instructions but a set program with pre-established prices is probably the best. Your lawyers can give you more specific advice, but if you do establish a formal plan so you can continue to buy in closed periods, then you should resist the temptation to tamper with it in open periods unless there is an absolutely compelling reason.

Almost every bank will have a specialized program that buys the stock based on volumes and prices being seen. Normally they will try and meet or beat the volume adjusted price every day. A good bank will give you market color and what sort of trading indications they are seeing during the day.

Typically you need to report on the progress of the share buyback on a quarterly basis. Probably no need to do a specific press release on the progress but you might have to formally announce that one is starting and when one ends. Normally you would set the period at one year at a set amount in total value you would repurchase and either announce it in its own press release or prominently in another press release like an earnings release. If you do a little searching on the Internet, it is easy to find statistics that show that actual repurchases typically trail announced and planned repurchases. They also tend to be more active in bull markets when stock prices are higher and less active in bear markets when stock prices are lower. That sometimes gets joked about in the press, but it makes a certain amount of sense. Bull and bear markets usually match pretty well with economic cycles. If you would only do a. Buyback when you felt you had excess cash and more was coming or available on the market, then it is highly likely that a company would start a buyback during a bull market and not start one during a bear market.

The publicity around the buyback often results in the company’s stock price going up, but this is very short lived in my experience. Any buyback would be a small percentage of the shares traded and it is more public relations than an addition of significant new demand for the stock.

My final point on share repurchase programs is that one reason often cited by companies is that they are doing the program to reduce dilution and the dilution often comes from their equity compensation plans. These same companies were ones that argued against expensing employee stock options because it did not cost the company cash.

Non-Deal Roadshows – what happens on them?

By

On March 22, 2016

In CFO, Investor Relations, Working With Investment Banks

Last week I covered investor conferences, this week I will discuss non-deal roadshows (NDR). In a typical company, NDR are the second highest source of in person meetings with investors (conferences tend to have the most meetings).

In many ways, NDR are very similar to investor conferences, they are another form of corporate access run by the banks that being management to meet with clients of the banks. Their difference is that the meetings are in the offices of the investors instead of at the conference site, but otherwise the meetings are similar in format to those at investor conferences. They are either questions and answers directed by the investor, a review of the standard investor relations presentation by the company or usually a combination of both. Regulation FD (fair disclosure) is still in full effect, so no material, non-public information can be discussed. You need to be extra cautious on any answers related to disclosure as you cannot confirm guidance as the SEC considers that as giving new guidance.

The main reason for doing a NDR is that it greatly increases the chances of you talking directly to portfolio managers or other key decision makers. These are the people that make the buy or sell call on your stock and they normally do not go to conferences on a regular basis. Normally they send their analysts to conferences. Another important advantage is that the larger firms with multiple funds often send multiple analysts or portfolio managers to your meetings where in a conference they normally only get one slot. So you directly access more decision makers at once. For the large companies, who and how many attend can be a good indication of how deep and broad the general interest at the firm is.

Logistics

Banks normally ask you to do a NDR for them. If there is significant demand, you may even get requests from banks that do not cover you. I recommend sticking to the banks that cover you as a courtesy and payback for the effort they make, but there might be a specific reason to use another bank. If no one has asked you and you want to do one, reach out to your covering analysts yourself or the investment banker that covers you.

Meetings are normally arranged by the sales force with the assistance of the analyst. If you remember from my blog on working with investment bankers, the sales force works for “the desk”, so your banker can help give a push inside the bank. So even if the analyst asked you to go out for them, there is no harm in mentioning it to your covering banker.

You can arrange your own meetings or suggest investors that you are targeting or that have requested a face-to-face meeting. The bank will want to limit the meetings to their clients and different banks have different tiers they service (large banks do not have many small clients while smaller banks will have more small clients). Even if you are suggesting a meeting, it is good practice to tell the investor to contact the bank and ask as well. The sales force may appreciate a chance to pitch to a client and start a relationship.

You are expected to make your own travel arrangements and pay your own hotel and meals expenses. The bank almost always provides local transportation at the city where the meetings are happening. Meetings are typically booked in 1.5 slots with 1 hour of meeting time and 30 minutes of travel time. In some cities the travel time is reduced and sometimes when there is big demand for meetings the meeting time gets crunched down to 45 minutes. Expect a long and tiring day, so try and get rest before the meetings. If demand is really large, expect a group lunch or dinner. Otherwise, make sure you eat.

Typical cities

This will vary, and I am writing as a USA-listed company CFO. I have lived in Asia, so I have more experience there, but not as much in Europe and none in the Middle East.

New York and Boston

These two have the most funds and have the most investment dollars available to invest in US companies. When you are offered an NDR, the analyst, who is at least partially paid based on trading volume run through his firm, will wants to do meetings in these two cities. I don’t mean this to be a travelogue, and I would assume that most people are familiar with the cities. NYC is bigger and even with the high density of funds, there can be lots of travel time from place to place. Very often you will get to a meeting faster if you walk. Traffic can a very, very bad. When the UN is opening a session or the President is visiting (or another major leader like the Pope), bad traffic can turn into a nightmare. Boston is a little easier to navigate as the central core where most of the funds are is smaller. There are several very large funds in Boston where you could draw a large crowd if they are interested.

There are a few pockets of investors outside in the greater NYC area, but normally the time it takes to get to New Jersey, Connecticut or Philadelphia is not worth it. NYC tends to have more hedge funds. Boston a bigger concentration of more traditional mutual funds. Both cities draw lots of management teams and the funds are not as excited about that as other cities are.

If you are traveling between the two cities, I suggest the Amtrak Express train. Much less affected by weather and the stations are right in the middle of where your meetings are. One major fund company is a cross the street from South Station in Boston.

Give yourself extra time, especially in NYC, to show ID to enter every building. Security can be tight. Make sure you bring picture ID.

London and Europe

This is probably the location with the largest concentration of investors. A few other cities like Zurich and Frankfurt have a good amount as well, but London is the biggest. My experience here is much more limited, but I have been to both conferences and NDR in London. Not too different than NYC where the concentration is good but traffic and the sheer size of the city means that getting from meeting to meeting can add delays. I was stuck behind the Queen in a horse drawn carriage once in London as some ceremony in the Parliament had her traveling and the traffic loop in from of Buckingham Palace is a main route to and from the City. You can end up with a few meetings pretty far apart and the Tube is the best bet to avoid traffic in that case.

Zurich, Geneva and Edinburgh are other cities that may be worth a visit. I have not been to Frankfurt or Paris but both have fund managers there as well. If you are already in Europe anyways, it may be worth an extra day or two to visit cities other than London.

Hong Kong

Like NYC, this is the city with the highest concentration of investors and probably the one where you are most likely to walk from meeting to meeting. The walking is through a maze of shopping malls, so a local guide is good. A lot of American and European funds have their Asian office here, so if there is an Asian connection to your company it is a good place to visit. Many hedge funds here that are either local money or branches of other Western hedge funds.

Singapore

I lived here for a few years and was CFO of a company listed in the USA but HQed here, so I did quite a few NDR there. You probably will not do too much walking here because of heat and humidity but the central core with most of the funds is not that large. For the most part, the funds here also have an Asian theme so not as much demand for pure American companies but if you have flown to Hong Kong it is not that far to Singapore. The sovereign wealth funds here can be good, long term shareholders if they are interested.

Smaller USA cities

One you get out of NYC and Boston, it does get harder to fill a whole day with meetings in most other cities. However, there are probably 10 other cities that have enough funds that a visit is worthwhile. One big benefit is that management teams do not travel to these cities anywhere near as often and you are much more likely to meet with a portfolio manager or other investment decision maker in a smaller city than a larger one. Smaller cities tend to have smaller accounts and make a good match for any smaller banks that cover you.

The meetings themselves

As always, I suggest that you do not go to the meetings alone. Running around NYC or other cities can be a logistical nightmare, and having a friendly person in the room with you can help protect you should strange trading happen while you are doing the NDR and people wonder what you said.

Your covering analyst will often go to meetings with you. They will write a report after the NDR, usually after giving their clients a couple of days to act themselves. This is a good chance to make sure they know you story better and can articulate the points you were making in the meetings. You also will get to spend more time and develop a better and more personal relationship with your analyst. I have never met one that was not overworked and understaffed, and spending 2-3 days with you on an NDR is a pretty big commitment. Understand that and try and return the favor, even if it is a few kind words about the analysts to the accounts they cover.

The other person that may attend your meetings in the sales person that covers the account. It might be tempting to think they are not as important as the covering analyst, but they are the ones with the day to day relationship with the people that may be buying and selling your stock. Many are very experienced and meet management teams all the time. Saying a thank you for their help and asking them what their clients are worried about might give you a good tip or two. I do know a good sales team makes a difference for your covering analyst and it doesn’t take much effort to show appreciation for the meetings you set up. If you ask in advance, the sales force will print your standard presentation out and make sure that their accounts have a copy. When they can’t attend the meeting, they might give you a copy to leave with their client.

Some accounts, especially in Boston, do not allow banks to attend unless on a deal roadshow.

The meetings with the investors themselves are quite different than at conferences, if only because they are in their office. You probably are meeting with some of the most senior people at the firms you are visiting, so listen to what questions they ask and ask a few questions back to them as well. I have always found the very big funds in Boston are the most courteous and respectful but they are also super professional. The notes from your meeting will go into a database and they keep track of what you say and what happens. The meetings are very much part of judging you as well as the company and the person that could be pulling the trigger on very big investments in you is asking you questions.

Like any marketing speech, you need three to five key points you want to leave at each meeting. Make sure you know what they are and deliver that message each time. You really only have time to do a few NDR a year at most, so make it count. Unlike investor conferences and talking to analysts, talking to portfolio managers at their offices can lead to quicker decisions.

Beating the Street

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

One Up On Wall Street: How To Use What You Already Know To Make Money In The Market

Investor Conferences

By

On March 15, 2016

In CFO, Investor Relations

A pretty standard press release from most public companies is an announcement that their executives will be attending a conference sponsored by a bank where they will be meeting investors. I’ll try and use this blog entry to describe what goes on at a typical conference and how to get your company invited to one. Unfortunately, these conferences tend to be invite only for the investors and they invite professional investors that manage money for mutual or hedge funds for the most part. There are conferences to meet angel investors or other forms of venture capital, but that is not what I’ll discuss here. Some conferences invite some private companies as well, but usually the presenting companies are all public companies.

You normally will want to go to a conference because it is a chance to directly talk to existing or potential investors. Almost every single potential investor will have evaluating management as one of their investment criteria and meeting in person is important. A non-deal roadshow is typically better because you meet more portfolio managers or other top decision makers, but conferences are an efficient way to meet many different investors all on the same day.

The first thing you need to do is get your company invited to the conference. These are run by the research division of the bank and legally they are separate from the investment bank services. So the banker you may have a relationship with can ask that you get invited but there is no guarantee (it almost always will be honored). If you are covered by the research group, you will almost automatically get invited to their relevant conferences. One service they offer to their customers is access to management and the conferences they run are very important to their marketing.

As coverage on your company grows, the number of invites to conferences also will grow. You will get invitations by banks that do not cover you. At a certain point, you will start to have to make choices about which conferences you will attend because you will get invited to more than makes sense, but that is a good problem to have. I tend to focus on and choose conferences held by the banks that cover my company to try and repay the resources they are spending on us, but you may also be building a relationship with a bank in the hope of getting coverage so that is just a rule of thumb.

Once you are invited, you need meetings. Normally, these are arranged by the sales force, sometimes with your analyst pushing. The investors that are attending have the list of attending companies and they normally request the companies they are most interested in. I generally try and be as efficient as possible and only sign up for one day if there are multiple days available. If demand is high, then you end up with some meetings of smaller investors that are 2 on 1 or 3 on 1. If demand is very high, the bank will ask for another day.

Conferences are a good opportunity for you to bring other staff along to learn something about investor relations. If your Controller has a goal to be more involved in IR, a conference can be good training. Since you are not doing a deal and because the meetings are a little more controlled and private, a conference is a good place to do some training and allow more staff to answer some questions. For local conferences, I have brought along the staff analyst who helped prepare the presentation. It is a good opportunity for them to see what questions you are asked and helps for the next version of your IR presentation.

I always try and have at least one other friendly person in the room with me. I do this for two reasons. The first is so that you have someone to help by giving you a break and answering a few questions or who can handle logistics like the presentation slot prep work. Although I have not actually had this happen, it is defensive as well. In case there is any doubt what was said in the meetings, you have another witness with you.

Conferences typically have two different ways of talking to investors. The first in private meetings, usually in one of the hotel rooms. They remove the bed and replace it with a small table and chairs. Most of your day will be sitting in that hotel room at the table talking. In a conference with normal demand, you will be answering questions from 8 AM to about 6 PM with the investors changing every 30 to 45 minutes. When I first started, it used to be common for management and investors to be constantly changing rooms and often dashing from floor to floor, but now the organizers tend to keep the companies in one room and the investors rotate.

I cannot emphasize it enough that you need to be prepared to be talking pretty much non-stop the entire day. Some meetings with just be you reviewing your standard presentation. Usually that is for investors that do not know your company or your sector very well. It can be a little frustrating to realize that you have potential investors in front of you that know little to nothing about you. You would think that they would do so,e homework before getting in front of a senior executive or that the covering analyst would have prepared them. However, many analysts use conferences to develop new ideas on companies or areas that they may become more interested in. Quite often they do not know your covering analyst as they have not really started to do any work yet. They have not done a lot of research on you yet either because they have not decided if you are worth it. So this initial meeting is your chance to make a good first impression. Of course, some people just randomly take a meeting to fill up their day and really should have done more work in advance, but you do want to talk to potential new investors so a few meetings like that can be good.

The other style of private meeting is just questions and answer. You never quite know what questions you’ll be asked and exactly what the topic will be. Time passes a lot quicker because you’re answering questions instead of doing your prepared pitch (which can get dry and boring if you do it often enough). You need to be careful when you answer questions because reg FD is in full effect – you cannot reveal any material, non-public information. You need to be particularly careful about guidance. You cannot reiterate guidance or change guidance. The SEC views both as new material, non-public information. Any past guidance needs to be treated as a historical fact, and you cannot express a current opinion on it.

The whole private meetings content is somewhat ironic. You are not supposed to reveal anything new that is material. You can give out some explanatory color around your public statements, but you need to be extra careful about what you say. That means in your scheduled meetings and in social events at the conference. Essentially the meetings should be about assessing management and filling in tiny holes in the public disclosure.

As an aside, it is not uncommon that someone does not show up for one of your meetings. Things happen and plans sometimes get changed. Let the event organizers know and ignore it. If there are a lot of cancellations maybe the demand was not too high and the sales staff tried to stuff a few meetings in but their clients changed their minds. Nothing you can do about it at the conference, so don’t let that effect your other meetings.

The other event that usually happens is some form of presentation. This is either you doing you pre made presentation or some form of fireside chat or panel in which the covering analyst asks you questions. If the conference offers the opportunity to webcast these, then take it. Each person at your individual meetings probably invests an order of magnitude more than any retail investor, but your retail investors are usually the largest investor, in aggregate. They are usually starved of any direct contact with management and the earnings call and anything you webcast from conferences is the only chance they will have to hear you speak.

No matter what, whether in one-on-one meetings or in the presentation, you need to have your key talking points decided before the conference even begins. Like a politician, not matter what the questions are, make sure that you deliver your message. This is an absolutely key feature of the conference. It is a chance to hammer home a specific message over and over.

When you are done, you might be thinking if what you just did will impact the stock price. There might actually be a big move around a conference but that is normally caused by groupthink of all the investors there. They tend to know each other and talk. If there is a good and positive vibe that comes from the conference they get excited. If they pick up a lot of negative body language from a lot of management teams they may get down on your sector or the market as a whole. Otherwise, as a general rule, you are talking to an analyst at the investor fund and they need to get back to the office and do a report to their boss, the portfolio manager. If they like you and convince their boss to invest it might be a week or two before any decision is made. If there is an immediate move in your stock at a conference you need to consider if you have out material non-public information.  If you did, involve your lawyer right away and there is a good chance that you need to put out a press release.

The final advice I would give is that other covering analysts often ask you to meet with their clients while you are in town, or even do an NDR and you should say no. As a general rule, it is considered to be impolite to book client facing activities around the conference. So meeting with the analyst themselves is ok, but if you do client meetings you will distract attention from the conference you are at. So unless there is a very compelling reason, politely decline client meetings except at the conference.

(picture taken at Dana Point, CA at the one conference a year with that type of scenery)

Powered by WordPress & Theme by Anders Norén