Investor relations and the art of managing market expectations
The relations between a publicly traded company and its shareholders vary with the share's performance. In recent years, a theory has developed regarding the management of relations with big investors, and companies are spending more time on what they call IR - investor relations.
The reawakening of the stock market in the past year and the difference between the companies that were warmly received and those that were eyed more suspiciously led many companies to reexamine their approach.
Statements such as, "In the long run the market will ultimately price the share according to a company's performance and not according to relations," are less accepted than in the past. The capital market speaks its mind all the time. It demands higher interest on the bonds issued by companies whose management practices bother it, and prices shares of another company according to the number of deals transacted by its substantial shareholders.
A company's success in raising capital (in the primary market) and the pricing of securities (in the secondary market) are the main indexes for the success of any publicly traded company. The ability to raise funds on the slightest margin above the government interest rate, or to show profits on a share - these are the name of the game. In most cases a steady increase of 10 percent in a share's price can be worth more to the controlling shareholder than a generous bonus at the end of the year.
One of the main arguments regarding the importance of IR is that the company's operational performance is not the only thing that affects the pricing of the share on the bourse. The market knows how to reward a company and executives who have built up investor faith over time. A company suffering a temporary crisis, but whose executives are not hiding and provide credible answers, will sometimes enjoy greater faith than a company that reports particularly good financial results, but suddenly and inexplicably.
Finding the right partners
How does a share become a brand? With whom would the controlling shareholders like the other investors to share? Why do they grant such big premiums to Teva's executives but not to the managers of Bank Mizrahi, for example, even though its credit portfolio is considered the best among the large banks? Why is Makhteshim Agan more popular than Israel Chemicals, when the risk exposure at both companies is basically the same?
Teva is known for the great importance it puts on relations with capital market activists.
Teva wisely defines its forecasts for the coming quarters, and then reports better results. The company's top executives are always available and make sure to provide satisfactory answers to questions that arise in the market. The publication of the company's financial reports is always accompanied by a press conference and conversations with local and foreign analysts.
Teva's relations with its investors also affect dozens of institutional bodies in Israel and abroad that own billions of dollars worth of Teva shares. This consideration for the institutional investors and the yields they have to show each year has led Teva to adopt a policy of never purchasing a company whose acquisition will affect Teva's net profits for two years in succession, even if assessments indicate that in the long term the acquisition will be profitable.
It took the court system seven years to reach a decision regarding the guilt of Shlomo Eisenberg, the controlling shareholder of Arad Investments, but the market "convicted" him as soon as the news broke, back in 1997, that a criminal investigation had begun. From that point onward, investors were suspicious of the whole group of companies controlled by Eisenberg - Arad, Isras and Team Computers - and their share prices suffered accordingly.
In August 2003, Middle East Tube, controlled by Benny Gaon and Nigel Davis, held a road show toward a bond issue. The arrest of Davis and another controlling shareholder, Aviv Algor, and the subsequent publicity of suspicions and the investigation against them put an end to the issue.
Half a year later the investigation had receded from the headlines and in early February 2004, after the Ma'alot securities rating company gave Middle East Tube an A rating, it managed to raise NIS 30 million in bonds from institutional investors. This week Davis and Algor sold their holdings in the company.
Compared to Eisenberg and Davis, Dita and Yehuda Bronicki, the controlling shareholders of Ormat Industries, have life much easier. Ormat's access to funds from the capital market these days is almost unlimited. The company's share is highly negotiable and its price has jumped 100 percent in the past 12 months.
Roni Gavrielov and Miri Segal run an IR firm in Tel Aviv. "A company interested in building up its value among institutional investors in Standard & Poor's shares in the United States have to contact thousands of executives and invest a lot of time and money," explains Segal.
In Israel, however, the equivalent community consists of about 250 professional bodies, all of which have offices within a one-kilometer radius of the bourse in Tel Aviv. Sixty of these institutional investors lead the market in terms of available money and market activity.
"Anyone who meets with 30-40 institutional investment managers and succeeds in changing the minds of some of them can change the way the capital market thinks about him and the company he runs," says Segal.
A steady presence
Some IR players feel that companies have to maintain a romance with the capital market, meeting with analysts, lunching with institutional investors, while others think that messages can sometimes be sent more efficiently via the media. Some company executives would rather let the financial reports do all the work, saying that in the long run, the market cannot be bamboozled and share prices will eventually settle at a realistic level. Others believe a minimal investment of energy will afford them broader fund-raising possibilities.
One such example is Yitzhak Tshuva, the controlling shareholder in Delek Fuel, which is trading at three times its equity value. Could Delek shares be fetching a higher price if Tshuva invested in IR? Quite possibly.
The man or the company
Do people invest in a company because they believe in its executives and controlling shareholders, and want to be their partners, or because the industry in which the company operates is interesting and thriving? Gavrielov explains that branding is important and that company executives need to be more visible to attract institutional investors.
The real test of branding is when an investment manager says to himself, "Even though I feel quite neutral about the banking industry, I will buy Israel Discount Bank shares because I feel that Giora Offer (the bank's CEO) is a good manager."
Gavrielov was quite surprised when Bank Hapoalim issued a forecast for its yields in 2004, since this was a revolutionary move on the bank's part.
"This is the first time the bank has related to the capital market and defined expectations. The banks have never spoken in the language of the capital market, always behaving as if they were doing investors a favor by allowing them to buy bank shares."