Ramping up communications to the buy side: given the reconfigured research community, public company CFOs need to re-learn how to most effectively communicate with institutional investors. An investor-relations expert provides some clues.

The thought process institutional investors employ to make investment decisions continues to remain a mystery to many public companies. Considering the fact that busy analysts or portfolio managers at these institutions spend as little as three hours per year engaged in verbal communications with any given company, it shouldn't be that surprising.

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Making the process seem even more esoteric, investment banks and their sell-side research arms have historically served as successful ombudsmen between public companies and their potential investors. But in the wake of weak market performance and securities scandals, the number of sell-side analysts (who cater to individual investors) has shrunk significantly--which is bringing companies and their potential investors closer together.

Reuters Research reports that over the past four years, sell-side coverage has fallen by 27 percent. In some cases, informal surveys and anecdotal evidence shows that coverage of companies in more mature sectors--manufacturing, process and utilities, and the very new, the Internet and some technology--has been reduced sharply or even eliminated. Analysts who survived the cutbacks have gravitated to the sought-after stocks that spur trading activity and provide the financial support for coverage. Many others joined the ranks of their buy-side brethren. Now, the sell side, smaller in size but not necessarily stature, is flanked by a beefed-up and certainly more sophisticated institutional investor buy side which is spearheading more of its own research and hiring third-party supplemental research providers.

The reconfiguration of research is changing the way companies conduct outreach to potential investors. Although sell-side communications remain an important element in investor relations programs, the factors that drive research coverage greatly favor large-cap or actively traded companies, companies in high-profile industries and companies with active merger and acquisition or capital raising programs. As a result, the approach to buy-side outreach has undergone a significant transformation.

Many companies are boldly taking their equity stories directly to the buy side with increased frequency. Making a beeline for the buy side in many ways may be the best chance, if not only chance, that some public companies have of generating interest in this competitive market.

In a recent study conducted by Citigate Financial Intelligence on how the evolving sell side is affecting public companies, 40 percent of small-caps reported a net decrease in analyst coverage. To counterbalance the negative effects of a shifting analyst community, over 70 percent of companies surveyed are carving their own path to the buy side. Ironically, over 75 percent of the companies who haven't increased their communications to the buy side are the same group that has seen the steepest drop in coverage: small caps.

Understanding the complexities of directly courting buy-side analysts and portfolio managers is the first and most important step to success. Many financial and communications executives make the mistake of myopically approaching outreach to the buy side in the same way as they did the sell side. Effectively targeting the buy side directly requires more sophistication than simply asking the sell side to do it for you.

Precision Targeting, Communicating

Each investment firm has a stated strategy that defines its investment style. Some firms are more disciplined than others in regards to adhering to it, but matching the strategy with your company's investment merits is important.

The identification of the ideal target begins with a realistic evaluation of the investment outlook for your company. Develop a clear understanding of the financial benefits of investing in your company and ensure that presentations and investor materials communicate those benefits.

Assess the other holdings in the buy-side firm's portfolio. Examine the quarterly buying and selling trends as reported in its public filings to get a quick view of where it is invested, the size of the investments and the rate at which the investments turn over. This relatively simple, but often neglected step can be eye-opening for many senior executives when they see for themselves how an investment manager acts versus what it says its intentions are.

Be realistic. As much as you may want a certain investor to hold your shares, the respected growth investor isn't going to be interested in the status of your turnaround, just as the high-profile momentum investor isn't going to be compelled to invest for the duration of your long-term strategic vision.

As a senior executive with limited time and limitless demands, there are few things more frustrating than a meeting with an investor who clearly has no interest in making an investment. By conducting minimal planning, leaving a meeting that feels like a waste of time is avoidable.

Maximizing Minimal Time

You know how tiring an investor roadshow can be with eight or more meetings a day. Repeating the same presentation is very taxing, and you only do it occasionally. The portfolio manager or analyst listens to it every day and then has to analyze what he or she has heard and determine whether to put millions of dollars behind the analysis. They also have to stay on top of their existing investments, identify new ideas and deal with the internal demands placed on them by their firm.

Scarcity of investor time is an under-valued dynamic in the investment process. Investors may have eight meetings a day, and six of them may be with competing investment ideas. Having the face-to-face meeting, either on a roadshow, at your offices or at an investment conference is a critical event that requires on-point communications that generate enough interest to entice the new investor to look deeper.

Don't assume the investor is familiar with your story. Be prepared to review the history. The existing shareholder may know the progress or changes, but the new investor may have no idea or perspective. Meetings with existing holders should be viewed as critical "check-ups" where investors are analyzing the health of their investments.

To ensure on-point communications, ask about their familiarity and what they would like you to focus on during the time they have allotted. Be prepared to give one of several presentations or simply be peppered with questions. At the end of the meeting, ask about follow-up and provide additional information. If you don't ask for their attention, they will most likely go to the next investment idea to cross their desk.

With mutual funds and large portfolios holding dozens and occasionally hundreds of positions, and the potential universe of investments often many times larger, the adage "the most important impression is the first impression" has never been truer.

Credibility Through Consistent Communications

The Information Age has ushered in an era of communication options that are mind-boggling. From Securities and Exchange Commission (SEC) filings to the chatroom, the spectrum of information sources and communication channels continues to grow. The challenge is to maximize the efficiency of communication and maintain consistency in the message coming from the company while monitoring third-party communications for accuracy or misinformation.

To truly maximize your communication efforts, there is no better tool than transparency. If your company communicates openly, the opportunity for misinterpretation or misinformation is greatly minimized and you will spend significantly less time reacting to rumors and conjecture. The companies that are struggling the most with disclosure regulations are the ones who do not have a practice of open communication.

Recognize that written communications are an important basis from which to build all other communications. Ensure that they are all available via the company Web site and archive conference calls for as long as possible. Announce publicly when you will be participating in an investment conference or other largely attended event where you will be speaking about the financial aspects of the company. Have replays available of all these activities for those who couldn't listen live.

Internally, establish a disclosure committee that actually meets to discuss the key communication points regarding the company and the issues being discussed in the industry. Appoint spokespeople who are briefed regularly and--if possible--together, regarding the company position on key topics. Importantly, remember that it is okay to say, "I'll need to get back to you on that question." Just be sure you do.

Measuring Results

Devoting a significant amount of time to investor relations activities warrants development of a measurement program. Often, people think you can't measure investor relations, or the measurement is the stock price performance, but the reality is that neither statement is true. You can measure investor relations, and the stock price is not a valid benchmark for the department's performance.

As with any part of the company, the key to effective measurement is good goal-setting. For example, establish a goal for the number of days you will allocate to investor meetings and how many meetings you want to conduct. Target the number of conferences you will attend. Analyze your current shareholder base and honestly assess its appropriateness relative to the financial outlook for the company.

Investor relations efforts can be measured and the results will be apparent when you conduct more meetings with qualified, interested investors whose objectives are aligned with yours.

When targeting potential investors, every minute of the CFO's time needs to be maximized, especially since you are being diverted from managing operations. If you're going to do it, do it right so valuable time isn't squandered. Regardless of how the sell side evolves, senior executives who take a more active role in their company's buy-side activities will reap the rewards.

Brooke Wagner is Managing Director for investor-relations consulting firm Citigate Financial Intelligence. He can be reached at [e-mail].