Capital Insight | Think. Connect. Invest. - Investor relations, Financial Communications, and Capital Raising

Myth: Strong market support for a stock always follows a traditional IPO.

You have probably heard this line a million times; however, nothing can be further from the truth.

The basics of an IPO work like this. A company hires an investment banking firm to serve as lead underwriter of the stock offering. A prospectus is put together to be approved by the SEC and FINRA. Next, the underwriter enlists the help of other brokerage firms, each receiving a commission upon the sale of stock to its customer. The underwriters technically purchase the shares from the company at a discounted price and then resell the shares to its customers, pocketing the difference.

What you may not have heard is that brokerage firms are encouraged to continue participation in the aftermarket if they want to be included in the initial sale and receive commissions. This ensures that people buy and sell the stock for sometime while the initial group of buyers can get out of the stock and make a swift profit. Without this aftermarket support, the stock crumbles, which can happen more often that you think in IPO stocks.

Sometimes the newly public company may be strong, gaining legitimate support; however, this manufactured support drives the stock in its early stages. There is no guarantee that this support will continue on after a few months, if at all.

David Feldman

The Reverse Merger Blog

www.reversemergerblog.com

Anthony Burke Boylan

Your investors, current and future, don’t get their news from just one source anymore.

Individual and institutional investors now get their financial and market information from many sources: traditional and non-traditional, old and new – reliable and not so reliable. These new media sources represent great opportunity, but more than ever a company needs to carefully consider how and where it distributes its news, and be vigilant about monitoring the variety of news and information sources made possible by the Internet.

This is where a media-savvy consultant – someone with day-in, day-out interactions with the rapidly changing communications landscape – becomes an invaluable resource. With all the communications outlets and opportunities available, it’s not enough to put out a release and hope it finds the right channels – if that effort ever was enough. You need a comprehensive strategy that reaches a broad range of investors, sophisticated and otherwise, through different channels.

A successful media strategy involves a combination of direct communication with your most active and interested investors, outreach to traditional media channels, and a cohesive strategy to get your story on the web so that it can be found by even a casual or novice surfer.

Traditional business and financial media, from newspapers to broadcasters to news wire services, once served as the authoritative outlets for news about corporations. They were expected by their audiences to be fair, if not completely objective, and their facts and reporting were assumed to be credible. Media and communications have changed radically. Formal media outlets have diminished. Virtually anyone who can post on the Internet, on the right site and armed with a few facts, can at least appear to be an expert. You need to make sure you are blunting any and all misinformation being circulated in channels that not only are unregulated, but often hard to monitor.

This can include ill-informed but well-intentioned bloggers or contributors posting on boards and chat rooms. Many are self-styled experts who have decided a negative and contrarian opinion is their ticket to notoriety. These can range from people who just don’t understand the issue, but pretend they do, to people with a self-serving agenda, to someone who is downright malicious because of a previous employment or consumer relationship with the business.

What they all have in common is that their voices would have been only one in the crowd before the Internet revolutionized communication in an egalitarian fashion that benefits society by allowing the occasional day trader the same online voice as that of a successful hedge fund manager. In fact, sometimes the most uninformed voices are heard the most clearly because they yell the loudest through their use of Internet tools and by perpetuating myths and stereotypes already held by the public.

And new media now shapes what newspapers write and broadcast stations put on the air. The research involved sometimes is no more than getting reactions from the “blogosphere’’ as if they have discovered a source the average person doesn’t have.

The further from general knowledge a subject is, the more likely the traditional media is to use so-called Internet experts. If your voice is one of the ones available to a legitimate outlet from MSNBC to the New York Times to your local community paper, your story stands a better chance of being told to your satisfaction.

Take the current banking situation. There is a deafening clatter of misinformation being spread. Why else would depositors run on IndyMac AFTER it was taken over by the FDIC? Is there one financial rule average consumers hear more often than that their FDIC deposits are insured? And could there be a safer moment to have your money in a bank than in the day immediately after an FDIC seizure?

Sure, you assume investors in small and micro cap companies to be better informed. But that isn’t always the case. Investors who strive to be informed on your company still face obstacles. They might get three different stories from three different sources. Many of these sources are questionable. You might feel confident a reporter from a major news outlet, even when quoting anonymously, actually is using a credible source. Can you be sure a blogger quoting an anonymous source isn’t making it up? There are no traditional ground rules in the new media. Even outright defamation, libel or slander can be impossible to enforce when the identities are shielded.

But even if the Wall Street Journal picked up every release you put out, handled the information in a journalistically responsible manner and quoted industry experts who spoke positively about your company -- that still wouldn’t be enough. While many established news outlets definitely carry authority and credibility, the sheer volume of alternative information outlets have diminished the importance and impact of traditional media.

Now your investors, and the people who shape their opinions, need your message to be spread across every available platform. It is ironic that these often are the same platforms that “ill-informed but well-intentioned bloggers and contributors” stake out.

Here are the three basic components to make sure your message is heard clearly and in a consistent manner that keeps it relevant to your mission:

Direct communication with investors, media, and analysts:

The primary communications responsibility of a public company still is to keep open lines of dialogue with current and potential investors, as well as the analysts and opinion leaders who help shape perceptions and advise others on investment opportunities. The new media can be a powerful tool in accomplishing this goal, but it requires an expert consultant to guide a company through the maze of options.

Some of the tools that always have worked in this area still do: conference calls, newsletters, earnings summaries and direct or e-mail correspondence. But there are new tools, as well, and those are covered below.

Outreach to established media:

No communication strategy is complete without reaching out to the traditional and trusted gatekeepers of news. Whether it’s The Wall Street Journal, respected industry publications, CNN.com or very specific web sites that deal with your business, recognized and respected experts still have a significant role in shaping well-informed opinions, and will for the foreseeable future.

The media might seek out your story – but this usually occurs when it’s particularly poor or exceptional. A “good news” story has never been quite as appealing as a juicy “bad news” story. In most cases you have to get your story to them, especially so you have a role in shaping how it’s told.

Convincing a publication, financial website, Internet media outlet or a respected online advisor that your story is a compelling one worth telling takes time, expertise and a knowledge of the media landscape.

Various news outlets maintain different standards of newsworthiness. A media expert can guide you through this obstacle course helping to tailor your communications with each outlet and advise you on the potential for difficult issues and questions and how best to address them.

Internet and Keyword SEO:

There are, of course, new tools that help you with this task. Conference calls and executive audio and video presentations can be streamed online where investors can find them. Releases to investors and analysts can be distributed through new media tools and not merely through traditional news wire services. PRWeb, for example, allows your information to reach every corner of the Internet and be seen by anyone who researches your company, products or services.

Simple software allows you to set up blogs or similar communication tools so that your company web site is among the first places people go for information on your company and your sector.

And a consistent effort to use keywords (optimized for search engines) ensures your information will be among the most frequently viewed web hits. This means you can speak as loudly – or louder – than all of the other voices that stand as potential distractions.

The end result is not that you have to change the message you are sending. It is that you have to work more diligently to make sure your message is received by everyone who should hear it, and that they hear it in the way you intend.

While new media does present new opportunities to communicate, it also means new obligations and more comprehensive strategies to take advantage of those opportunities. Companies that don’t employ a strategy to meet all of these opportunities risk allowing someone else to define them.

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Imagine your company’s entire target audience was no larger than the population of Bedford Falls. And on a day you needed to get critical information to them, they all lined up in front of your business.

All you’d have to do is send someone with the passion and charisma of George Bailey to assuage their fears, and you could drive home any message, avert any crisis.

That was the case, of course, in the idyllic setting of “It’s a Wonderful Life,’’ but it’s certainly not true in the real world.

Recent public reaction to IndyMac Federal Bank’s failure might be an extreme example, but it’s further notice that you can never say something to the public too often. Part of the issue is the general pessimism of the time, but much of it is human nature.

Consider that depositors lined up outside of the institution to withdraw funds already taken over by the Federal Deposit Insurance Corporation.

Despite three full days of announcements that deposits up to insured levels were safe and secure, despite the continued access to funds through credit cards, checks and ATMs, and despite assurances the bank would reopen on Monday, depositors lined up as if the failed thrift would be dispensing diamonds for each dollar owed.

A multi-day media blitz that used print, television, internet and everything but skywriting failed to quell the fears of the general public.

If that’s the case, can you really imagine that your company’s efforts are doing even a fraction of what you’d like them to do?

As a company you face many obstacles not only to getting your message to investors, but in getting it out without it being altered and even inverted along the way.

Companies face a busy public that isn’t always tuned into communication channels, a skeptical media happy to raise or even exaggerate doubts, and an online community that is likely to spread fear and rumor more eagerly than the cold hard facts.

A few years ago a situation like IndyMac might be shrugged off by the general public as a fluke. In a sour economic environment, it can be elevated to inevitability.

So you’ll have to do a bit more than ol’ George Bailey to communicate with your investors, your clients, your community and business industry – especially when rumor and speculation is most likely to run to the negative.

Tony Boylan

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The need for growth and operating capital leads companies to pursue a variety of options, including so-called non-traditional alternatives such as PIPEs (Private Investment in Public Equities) and numerous iterations of private equity placements. Traditional investment banks, and the aftermarket services they have provided such as institutional sales, market making, non-offering road shows and research coverage, have become far less accessible except to the largest corporations.

More of the burden for maintaining visibility following a capital raise is falling to the corporation. Although there is still plenty of capital available, many of the new funding sources simply don’t have an aftermarket support infrastructure. Following a completed equity transaction, the first priority for the company and its management team get down to the business of putting that capital to good use – running a business.

But it’s unfortunate if a company loses all the momentum it gained from its significant efforts to raise capital through marketing and presenting a company in the best light possible. Corporations that don’t initiate an aftermarket communications and investor relations strategy run the risk of becoming invisible – lost in the noise created by thousands of other companies, indices, investment opportunities, market news and financial information.

Of course, sound financial performance is the best reward for the company and those who helped generate the capital. However, a company can do itself and its stakeholders a great service by establishing a high level of communication and information flow during the critical months and years following a successful capital raising transaction.

As long as a stock is traded on a public exchange, there are significant potential benefits to keeping the lines of communication to the investment community open. What company doesn’t want additional investors, increased trading volume, improved liquidity, and more attention from potential stakeholders? Even the smallest publicly held company can cut the swath of a much larger company. In other words, if you’re not a Fortune 500 company, you can still communicate like one. There are rewards for doing this.

Let’s backtrack for a moment. In the traditional IPO or follow-on equity offering conducted by an investment banking firm, companies expected to turn over a significant amount of cash and stock to the firm in exchange for the deal getting done at an attractive per-share price. Following the deal, support was expected in the form of market making, a bustling institutional sales force working on your behalf, and well-publicized equity research. In other words: ongoing visibility.

That remains the classic and ideal capital-raising scenario in the minds of many corporate executives. However, a more realistic scenario for most companies, particular micro- and small-cap corporations, is that a capital raise will be a relatively low-key affair involving a few critical players. Still, the good work done to prepare for and make these deals happen shouldn’t go to waste once the deal is completed.

One of the most effective ways is to establish a solid aftermarket presence is an investor outreach and communication program, utilizing skilled and serious investor relations professionals to assist with a long-term strategy to maximize shareholder value by disseminating the right messages to the right investors. News releases – a powerful way to communicate with the entire investment community via the Internet and other means of electronic distribution – can keep the Street posted on a company’s accomplishments and financial goals. Credible company-sponsored equity research is available, and increasingly respected by investors. Virtual and in-person investor meetings enable management to reach out to money managers and brokers.

The keywords for a successful long-term aftermarket effort are “consistency” and “credibility.” Who isn’t familiar with the newsletters and emails promising “the next big price move” or touting the rapid price escalation of a particular stock due to their outreach efforts? Many of these are funded by the companies themselves. Unfortunately, they yield spotty and often short-term results, if they generate any positive results at all.

After years of tracking such activities, it’s clear that in virtually all cases, the only winners in this game are the few investors who bought, got lucky, and sold quickly before the stock sagged back to previous levels. The prospect of quick appreciation and increased volume sounds appealing to many corporate executives, but these methods don’t produce long-term results. They hurt management’s credibility more than they help.

A more viable approach to attracting long-term investors and generating sustainable share price increases is to establish a commitment to best-practices communications with the investment community. Reporting hard and soft metrics, discussing cash flow, burn rate objectives (for younger companies), margins, capital expenditures, returns on invested capital – these are the ways to impress potential investors.

Even individual investors have access to more technical analysis, historical trend information, ratios, performance data and expert opinion than the most sophisticated institutional investor of 20 years ago. And with a few mouse clicks, investment professionals, using an unprecedented number of analytical and informational tools, can identify all the performance metrics and information they need to include or exclude a company.

In the months and years following an equity financing, a company can dazzle investors with performance. The plethora of available information makes it impossible to dazzle the Street with hyperbole or by selectively sharing only the most positive news and financial metrics . Traditionally, equity analysts and the financial media shouldered the burden of sifting through and objectively reporting information and expectations about public companies. With fewer analysts and a diminishing number of “authoritative” media outlets, the responsibility of providing investors with clear, detailed, honest information increasingly rests with the corporation itself. This is a challenge, and also an opportunity. Even small corporations can impress the Street with their reporting, integrity, management credibility and sophisticated financial communication.

The long-term rewards are potentially significant, attracting the attention and respect of potential investors while assuring shareholders the company is doing everything possible to enhance visibility. An investor relations consultant with thousands of affiliations and contacts can help target long-term, committed investors who would move such a company to the top of their watch lists. By employing this type of aftermarket effort, a corporation is far less likely to find itself orphaned, lost in the shuffle and followed only by handful of increasingly disgruntled stakeholders.

With the responsibility for aftermarket outreach increasingly shifting to the corporations themselves, a company with a cogent communications and outreach strategy has a distinct advantage. This enhances opportunities to achieve for maximum forward valuation for anticipated performance and to build a growing, diversified shareholder base, resulting in contented early-stage investors and improving its odds to obtain additional financing should the need arise.

Tad Gage

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My colleague, Tad Gage, recently commented on our "auspicious" timing related to the launch of Capital Insight Partners. I'd like to further explore that sentiment.

With our stock markets in disarray and iconic American companies like Motorola in shambles, one might reasonably ask why we are so bold to launch during an economic downturn - or may I use the word recession?

I dare to say that Warren Buffet is not the only investor salivating right now. JP Morgan's stock is trading where it was prior to its purchase of Bear Stearns. Dozens of well-run publicly traded community banks with zero participation in subprime lending are trading below book value, many at half of book value. These are historically low valuations.

The world is looking to America for a big change this November. We aren't political hacks, but significant change does appear on the horizon. Will steadfast political transformation spur an economic rebound? We don't know and aren't intelligent enough to make a good guess.

But we do know that there are many, many smart portfolio and hedge fund managers, individual investors, and others that are positioning to benefit from an economic turnaround. We talk to these folks every day.

While others are immersed in negativity, we see resilient American entrepreneurs. We see small and micro cap companies in a wide array of industries demonstrating solid growth and strong potential, most with depressed stock prices. We help the most promising companies tell a better story – to the right audience. To succeed in this economy (or any other), that really matters.

Jacob Eisen

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This is an auspicious time to launch Capital Insight Partners. Somehow, it seems like overnight, we're living in a new and very different world. Maybe it was just sneaking up on us.

Barack Obama will be the Democratic presidential nominee. His opponent, John McCain, is healthy and energetic and showing us that age is just a number. Gas prices are up 31%, probably aren't going down, and many countries are saying "welcome to our world." General Motors announced plans to shut down SUV factories and may discontinue its Hummer line. Travel is less convenient and certainly more expensive. Mighty financial institutions have been humbled. The financial markets currently offer a lot more questions than answers.

If there was ever a time to take a fresh look at things, including how companies communicate their values and goals to customers, investors and employees, this is it. Things will settle down. But it's hard to imagine things will ever be the same. The decisions we make, starting today, will have a profound effect on the future.

Despite the discomfort the "new reality" is causing (and change is seldom a comfortable process!), we at Capital Insight are also excited. We see new opportunities for companies. We see fresh and creative ways to communicate those opportunities. There are new ways for businesses to obtain capital and build shareholder value.

It's pretty clear that doing and looking at things differently are going to be America's and the world's marching orders for years to come. So we think it's a great time to do our part by offering companies new and effective strategies to help them grow and prosper in these challenging yet exciting times!

Tad Gage

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