Commerce via IPO
When discussing an IPO, many people mistakenly believe that the value of a company’s shares depends exclusively on said company’s financial indices. Indeed, these same people neglect to consider that each shareholder is first and foremost a person to whom an approach should be found. Moreover, the skill of properly establishing relationships with investors is an entire science without which there could not be a successful IPO.
Oftentimes, during an IPO light is shed on a company’s true owners and the condition of the company’s shares. Laws are on the side of investors, and these laws require issuers (the companies floating the securities) to fully open their books and records prior to going public. In this situation, the role of PR specialists is immaterial, as the financial records will speak for the company. In actuality, the work of a team handling communication with investors becomes a key factor when fully disclosing information.
Accordingly, several decades ago new field appeared, called investor relations (IR), which does not fall within the parameters of traditional PR. Initially, IR involved only communicating with shareholders, but soon similar methods were applied to working with the owners of any securities. Today, IR services are even required by companies simply wishing to take out bank loans. Nevertheless, an IPO remains the main field of activity for IR specialists, and the largest stakes are found here, given that an unsuccessful IPO could set a company back many years.
“An IPO is a significantly more complicated process than simply attracting money, for example, the issuing of eurobonds. This is an entirely different level of information disclosure. Shareholders lose money if shares drop in value, thus, correspondingly, a much higher level of trust is required,” says Andrei Kletsko, deputy director at Mirax.
Strategic Problems
Next come underwriters (companies managing the floating of securities) to maintain a good relationship with investors. “Often, issuers, who have just begun to go public, hand the work of IR specialists to investment bankers,” says Olga Buyanova, general director at FlashComm. According to Buyanova, a wide range of market players only know a little about the IR industry. “The abbreviation ‘PR’ has been familiar for a while, although not everyone realizes its full meaning. In terms of IR, most people ask, ‘what is that?’”
The typical error committed by second-tier companies is seeking a PR agency for issues associated with the issuing of securities. “We have a very young market and the IPO processes began only a few years ago. So, we are still working out the proper procedures, and often, to save some money, companies do not hire the right people,” believes Konstantin Lebedev, lead consultant of the valuation department at Cushman & Wakefield Stiles & Ryabokobylko.
This type of IR policy can quickly lead to publication in the press. Meanwhile, media relations is just one of the PR instruments, while PR is just of the of IR instruments. In international companies, investor relations are taken very seriously, and the PR department only acts upon the permission of the IR manager, while the agency which will handle the IPO is chosen very carefully.
“Hiring an IR company is necessary if a large group of international investors will be targeted during an IPO or SPO, and this is especially important during the first steps. Therefore, it is important to hire a large and respected Western IR agency with the required experience, developed technology and corresponding materials, presentations, press releases, road shows as well as conferences with representatives from the Western mass media,” says Oleg Davidko, director and first deputy director at OPIN (Open Investment).
The Nuances of Opening Up
At the early stages, IR can establish a company’s entire tactics during an IPO. It is important to speak with investors in the same language, but also be able to listen. “There are generally two main goals to IR. The first is to inform the investment community on the company’s strategy, the main business idea, success factors and competitive advantages and convince investors that specifically this company will generate considerable profitability.
The second goal is just as important and this encompasses establishing lines of communication and feedback with the investment community during road shows. The IR service gathers very important and valuable information, such as investors’ opinions of the company’s sector of operations, investors’ opinions of the region overall, the country, what the highest risks are with the company’s activity, according to investors, as well as issues concerning corporate governance.
When meeting with investors within the framework of conferences, an IR company can receive first-hand necessary information for professional valuating and analysis. Quite often, this information allows for rendering a reliable management decision and for properly addressing risks and concentrating on the competitive advantages,” says Davidko.
There are stringent standards for disclosing information during an IPO; therefore, a large part of the documentation passes through the IR agency to employees who are familiar with all the significant nuances during an IPO. “An IR agency can be responsible for everything from press relations to preparing presentations to clients. But this is just the first stage, as IR specialists are hired specifically to prepare financial records,” says Lebedev.
One and the same figures in the report could be combined with various totals, if the key points are highlighted properly. “It is not enough to publish the balance, as proper commentary must also be included. For example, if there were some changes and profits decreased, we could calmly explain that this happened as a result of developing the investment program. So, this becomes a plus rather than a minus,” says Buyanova.
To issue shares in Russia, significantly less information must be disclosed vis-a-vis most foreign bourses. Nevertheless, experts note that companies prefer to report more about themselves than required by liberal legislation. The company’s goal is not simply to float shares, but to sell them profitably, and this requires convincing investors that they are not at risk when buying the shares.
News and Lack Thereof
Shareholders are a special group. In terms of the traditional means for promoting a product, a safe strategy could produce the desired results. “Shares cannot be pushed too aggressively. Indeed, a company’s history must be openly and professionally disclosed, as well as its strategy, key business risks, and a financial model forecast must be intelligently set,” says Davidko. “One should remember that investors will expect financial forecasts presented during a road show to be achieved. If this does not happen, there could be a downward correction in the shares’ value.”
Printed material during an IPO has significant meaning, as information in the press could attract investors to the company, but could also lower the company’s value. “Press reports are very important. The significant amount of a company’s information is obtained from open sources. Also, risks will be assessed based on indirect information passing through the PR market,” believes Kletsko.
Articles in the Russian press are generally prepared taking the Western reader into consideration, as the majority of companies going public are counting on an influx of foreign investment. “In Russia, investors read one set of papers, while consumers read another set. In the West, these two groups virtually intersect, given that a large part of the population is invested in the stock market. Therefore, the approach to relations with the press also substantially differs. For example, it is now very popular to present social and economic results. In the West, it is important for both consumers and investors that a product is produced from environmentally friendly materials, the environment is not polluted during production, and that the product is not tested on animals. In Russia, consumers and investors still consider different factors,” says Buyanova.
Good news in the papers could generate substantial demand for shares. “Many investors operate based on news reported about the market. Some investors analyze information themselves and calculate what a company’s value should be, while others invest impulsively based on good news. There are different types of investors, such as long-term and short-term. Each one has his own strategy depending on the set goals,” says Michael Golomb, director finance and investment at Sistema-Hals.
It is also important to take a break in relations with the press. “The information flow is very strictly controlled by the underwriters. There is a period of silence, when there is not any information on the company’s going public. Prior to that, when the underwriter is being selected, company management can announce its intentions for going public to its heart’s content. However, once the process is underway, such as preparing financial reports, valuating the company, auditing and checking of legal standing, there is a period of silence. So, if a company is not commenting on what is happening, most likely it is preparing for an IPO,” believes Lebedev.
The period of silence could last up to 60 days prior to the deal and 40 days after. Moreover, the Securities and Exchange Commission (SEC) in the U.S. strictly monitors the activity of issuers. For example, when representatives of Salesforce.com gave an interview to The New York Times during the preparation period for the company’s IPO, the issuance was postponed for six months. These steps are taken to avoid a manipulation of the shares’ value prior to an IPO.
Valuating Everything, Even the Coat Rack
For a company operating on the real estate market, the target group is relatively small. “The IPO’s of development companies are geared toward a specific group of investors. The group of shareholders here is significantly less than the issuance of, for example, the largest oil companies; therefore, PR in this case is even more important to expand the investor pool,” says Thomas Ducal, deputy director of the financial markets and investments department at Jones Lang LaSalle. According to Ducal, the deciding factor on the real estate market is to have personal contacts from start to finish of any IPO.
Initially, as part of pre-marketing, underwriters organize a series of meetings with a wide pool of investors, and it is possible to gauge the reactions personally at these meetings and come to a number of important conclusions for the resulting road show set as the final event. Indeed, specifically during a road show investors make their final decisions on whether to invest in a company.
“All negotiations during a road show go according to a separate scenario. Following the presentation, the company’s key field of activity must be spoken about, while negotiations during which separate deals are discussed are completely different. A road show is a rather difficult process. Meetings could last for several hours, while there is typically an average of five to six presentations per day,” says Kletsko.
A road show is a serious test for a company’s representatives, given that there could be completely unexpected questions posed during the meetings. “The task of the banks is beforehand to use the valuations of analysts and also gather information on a company preparing for a road show. Accordingly, a company’s representatives must prepare for possible questions. Frequently, investors even tell us that they did not want to listen to the presentation, given that they already knew everything and only wanted to ask questions,” recalls Golomb.
Selecting potential investors with whom to meet is the responsibility of the underwriters. “Personal contacts are very important,” believes Lebedev. “We have a good example, when a team of investment bankers, who had already held several successful IPO’s abroad, attracted investors with whom they had already worked. The underwriters already knew their investor pool and could better prepare the company. Also, investors reached their decisions considerably easier, as they knew who was on the other side.”
Investors can prepare for an IPO less thoroughly than the issuers. According Kletsko, only 20% of future shareholders know a little about a company prior to a road show. According to Golomb, during Sistema-Hals’ IPO, around 60% of investors were in possession of information on the company prior to the presentation.
During a short issuance period, a road show could take two days, while this timeframe increases to two to three weeks for a first-tier company.
Only several people go to the meeting, for example, one or two of the company’s representatives (usually the financial director and another high-ranking manager) and several potential investors.
“It is important for many investors to see someone face-to-face and shake his hand. Personal contact is very important. When people are investing $50-$100 million in a company, they want to see under any circumstances the person to whom they are entrusting their money,” says Golomb.
A lot depends on the charm of the person representing the company. “The professionalism of a company’s representatives is first and foremost assessed during a road show. Indeed, everything is scrutinized, even the outside look. The rules are very simple: everything must correspond to a set level. There could even be some bad figures, but the situation could be saved. Or, the opposite could happen, when the indices are good, but the negotiations break down,” says Kletsko. There have been cases when investors have decided to buy significantly more shares than initially planned. Therefore, a road show in Russia substantially differs from one taking place in the West.
Increased Business Risks in Russia
Overall, the problem of Russia’s image and Russian money in particular have occupied the thoughts of the best minds for a number of years already. Indeed, the Western press from time to time prints articles raising issues on how ethical it is to acquire Russian shares, taking into consideration the level of corruption in the country. In addition to this, Russia’s real estate market has always been considered extremely non-transparent. Consequently, most market players reckon that the country’s image cannot have an objective influence on the valuation of a company.
However, investors are well-grounded people, thus they are first and foremost concerned with objective risks assigned to the country by rating agencies. According to Ducal, the stereotypes of Russia embedded in the minds of the average European does not influence the situation of Russian companies on the stock market at all.
Russia’s real estate market is renowned for high profits and low transparency. These factors also determine the pool of investors. “Those investors putting money in Russian industry already know the country well and have accepted the risks involved. They are prepared to work on all developing markets where not all problems have been resolved, but this also produces additional profits. The yields on real estate in Europe are 4%-5%, while in Russia they are 10%-20%; therefore, those who are prepared for this risk come and make a profit,” says Golomb.
On the other hand, there is a group of investors who will never invest in Russia, irrespective of the high yields, and these are typically pension funds. Moreover, there is a pool of investors who operate exclusively in Moscow, and there are those only in the regions. Everything depends on an investor’s strategy and the expected profitability. Another distinctive feature of the Russian real estate market is the increased attention on the part of investors in such intangible assets as an underwriter’s connections with the government (so-called “administrative resources”).
“A large advantage is that legislation is being improved, especially in the real estate industry. We are quite often asked about relations with the Moscow administration. So, given that we already represent the full process well and have an interrelationship with the authorities, this is a big plus,” says Golomb.
In conclusion, not paying attention to the public relations, specifically the investor relations, aspects of an IPO is a sure recipe for losing trust in a company with even stellar financial records, but this is just the way the process works. It is difficult to hide actual problems behind a brilliant IR facade under conditions of full transparency. Therefore, any expert would highly advise establishing relations with investors on a personal level.