Lessons in courting overseas investors.

When MCI decided to develop a strong investor relations presence in Europe, it conducted a fact-finding mission to learn more about the market. Here's what it found.

It's axiomatic that American companies operating globally must have a presence in the world's capital markets. The process for establishing that presence, however, is anything but self-evident. What's appropriate for Consumer-Product Company A is not necessarily the best course for Construction Company B. Also, companies often need to assess whether they need an international investor relations program or to expand further into second-tier U.S. markets. For MCI, deciding how best to introduce ourselves to overseas investors required a blend of strategic targeting, cultural sensitivity, knowing the strongest players among the various institutions and understanding how those players make buying decisions.

In eyeing Europe for an investor relations focus in the early 1990s, we had too few of these facts to direct a credible research effort, much less create a plan of action. So before making any large investments in time or money, we decided to do our own legwork, which started with an in-house effort to first understand the environment and then to establish clear goals and strategies.

Senior management approved a fact-finding trip to Europe for the investor relations staff. The overall objective was to assess the international opportunities so that we could recommend the right program. We needed to speak with the players, including both buy-side and sell-side analysts, consultants and others. Plus, we had to determine how likely they'd be to invest further in U.S. equities. To do that, we needed to learn how and why these investors bought American stocks and what kind of service they expected.

As our first step, we decided to learn as much as possible about MCI's existing foreign ownership base. The Securities and Exchange Commission's 13-F filings aren't required overseas, so we were deprived of one important source of information. So we enlisted the support of a targeting and surveillance firm to track who our investors were and to take an initial "snapshot" of our overseas shareholder base.

At the time of our investigation, the level of European investment in U.S. equities was at a low point, running 6 percent to 8 percent below normal levels. We found that the European market's primary concerns were the sluggish U.S. economy and the perception that the U.S. equity market was overvalued. Also, the Europeans showed some uncertainty about the results of the upcoming U.S. presidential election.

European investments in the United States reflected this atmosphere with a focus on cyclical opportunities, blue-chips and high-growth sectors of the economy. To complicate matters further, a large number of corporate road shows, not to mention a flood of IPOs, were underway at the time.

SHARE AND SHARE UNLIKE

One of the things we've noticed most about foreign investors is the perceptual difference between them and U.S. investors in defining share position. For the most part, the average share position is smaller than what we would consider standard in the United States. For example, a foreign investor would consider a $10 million to $20 million share position to be a very large holding. An average share position is usually about $2 million to $5 million.

Also, foreign buy-side analysts tend to be generalists, following up to 100 stocks in some cases. These analysts are heavily influenced by the sell side, relying almost without exception on the research of U.S. analysts to evaluate the U.S. market. Company name recognition through international press coverage strongly influences the analysts' decision-making. It didn't surprise us, therefore, to discover that European investors were long-term holders, maintaining a focus that was much more strategically than financially oriented. Plus, European analysts collectively had only a limited understanding of the global telecommunications industry, its products or its competitive dynamics -- elements that are key to evaluating our performance and long-term strategies.

In this context, the demand for information was just as compelling as anywhere else, perhaps even stronger. We discovered a strong desire for direct company communication, particularly one-on-one sessions with senior executives. The latter was especially true for firms that had taken a position with a company, although CEO or CFO presence isn't always mandatory. In fact, in most cases a meeting with the investor relations staff satisfied their needs.

The style of presentation that worked most effectively in Europe, however, was decidedly more subdued than is usual in the United States. By nearly all accounts, the most effective presentations were strategically comprehensive in content -- yet informal, even low-key, in tone and demeanor. Large meetings of more than 50 people, which attract legions of subordinates as well as principals, were not as productive as smaller gatherings of 10 to 20 people or one-on-one sessions. We found that European fund managers were frequently inundated with invitations to large meetings, and they avoided asking hard questions in this kind of setting. Executives accustomed to the robust give-and-take atmosphere of U.S. meetings should fashion their presentations to draw out questions and discussion and tailor their material to more senior-level managers.

After identifying the players and interviewing a number of foreign shareholders, we came back with a good understanding of the environment and of the various channels available to cover the market. In formulating our recommendations for a trip to Europe with senior management, we built a matrix to objectively examine future marketing alternatives: sponsorship by brokerage firms (U.S. or foreign), European-based investor relations consulting firms and in-house management.

To us, the U.S. brokerage firms were by far the most cost-efficient choice, providing turn-key monitoring and presentation capability, existing client relationships and good follow-up. The reputation and quality of U.S. analysts weighed heavily in our decision-making. Their coverage of the European markets, however, was limited to their client base.

Foreign consulting firms, on the other hand, provided the widest coverage, the most subjective analysis and the broadest mailing lists. It's no wonder that many U.S. companies contract with these firms when marketing overseas, although the price can be very steep. But, for us, their attractiveness was diminished by their limited understanding of the current state of global telecommunications and our role in that market.

Foreign investors' perceptions of MCI lagged behind those of U.S. investors by approximately two years. For instance, few of them knew that MCI had expanded its strategic focus into international markets. Regardless of what marketing channel we decided to use, closing this education/communication gap clearly would be a factor.

The third alternative, in-house management, was the least attractive option. An in-house program would be too time-consuming and would drain our staff's resources, and we lacked the key contacts, logistical support and the ability to follow up in detail.

DO YOUR HOMEWORK

We distilled our information into a plan that we submitted to the company's senior management, which approved it. The lessons we learned were good ones for any company considering a European investor relations focus. First, there's no substitute for doing your homework. You need to do some research and talk to the investors to understand the environment, assess the players and identify the real opportunities for your company. Only with that knowledge can you define clear goals and strategies.

Second, it's not always necessary to mount a large-scale effort in Europe. That may not even be as valuable as simply establishing relationships with overseas investors, keeping them informed of company performance and strategy and developing stronger relations with European brokerage and investment relations firms. And don't neglect the media, because international press coverage is important in educating foreign investors about your company.

Third, when you're thinking about developing an investor relations focus overseas, remember that you don't have to cover all of Europe. If your investor relations budget is limited, you may want to consider targeting only the countries where you're most likely to succeed.

Finally, bear in mind that foreign data bases of shareholders are sketchy compared to those in the United States. If you want to pursue overseas investor relations opportunities, use your investor relations resources to enhance those data bases and incorporate tracking systems into U.S. activities.

At MCI, we believe you'll succeed in developing a good foreign presence if you approach your relationships with foreign investors the same way you do with your customers: Know your market, find out what it needs and provide it, building strong relationships along the way. Then sit back and see what you come up with.

GOING FOR BROKER

Choosing the best overseas brokerage house is no piece of cake, as MCI can attest. To find the best fit, the investor relations staff rolled up its sleeves and went to work, bending the ear of dozens of foreign buy-side analysts to find out, for example, which houses they mentioned most frequently and which had the best reputation and broadest coverage in overseas markets.

MCI also evaluated sponsorship (the reputation and recommendation each brokerage house had from its analysts to buy, sell or hold MCI stock), the markets the firms served and their facilities for hosting events overseas, plus their sales force and ability to follow up. Then investor relations developed a matrix to evaluate which brokerage was the best bet. As you can see, company A scored highest across the board.

But that's not the company MCI picked. The brokerage had one big drawback: an enthusiastic analyst who recommended a hold instead of a buy on MCI stock. So the crown went to first runner-up, Company B.

What made the difference? Company B also had a strong analyst and an excellent reputation and sales force, although its events group was less experienced at hosing overseas events. And the fact that the company was on the road show with a competitor was a plus, because it meant that it understood the telecommunications industry well.

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Ms. Weaver is vice president, investor relations, at MCI Communications Corp. in Washington, D.C.