Struggling to get attention: in the past few years, smaller public companies have found rough going when it comes to getting analyst coverage and the investor attention that goes with it. Hiring an outside specialist to handle IR is a route many should probably consider.

Julie Bradley, CFO of Cambridge, Mass.-based Art Technology Group, which trades on Nasdaq, has a lament that is echoed by a lot of smaller public companies around the country: it's harder than ever to get an analyst's attention.

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"Currently at ATG, we are followed by one regional firm. Just five years ago, the company was followed by more than 10 analysts," Bradley says. "Small companies need to be proactive with the investment community and need to deliver a clear and compelling message. We're competing against thousands of other small companies for the attention of a limited number of analysts and investors."

Differentiation from the pack is a tough proposition for any publicly traded company nowadays, and the challenge is even more formidable for smaller entities as downsizing and regulatory factors have altered the investor relations landscape.

"The consolidation among sell-side firms and the fact that investment banks generally focus on larger-cap companies has created a challenging environment for small-cap companies," says David Calusdian, executive vice president of Boston-based Sharon Merrill Associates Inc., an investor relations firm.

Wall Street's reshuffling efforts of recent years--many sparked by charges that analysts were too beholden to their investment banking colleagues--have resulted in fewer analysts who are spread thinner, making small-company coverage even more elusive. Reuters estimates that since January 2002, 691 companies have lost analyst coverage. Moreover, a June 2005 Nasdaq press release stated that approximately 1,200 of its 3,200 listed companies and 35 percent of all public companies have no research coverage. The same release indicated that 50 percent of all publicly held companies have two or fewer analysts covering their firms.

"The downsizing of sell-side analyst coverage has hit the small firms disproportionately because their trading volume, and hence potential for commissions, is so much less than large firms," notes Brian Bushee, a professor at The Wharton School at the University of Pennsylvania who co-authored a 2005 research paper with Harvard Business School Professor Gregory S. Miller entitled Investor Relations, Firm Visibility and Investor Following.

Impact of Reg FD

Regulation Fair Disclosure (Reg FD, which took effect in 2001), which eliminated selective disclosure practices, has also had an impact. "Since information must be simultaneously disclosed to all interested parties, much of the information monopoly enjoyed by the investment banks has been mitigated," says Craig Lewis, professor of finance at the Owen Graduate School of Management at Vanderbilt University.

"This creates a challenge for smaller companies to communicate with potential investors because investment banks now find that the number and magnitude of trading opportunities are fewer and smaller," he adds.

So, what's a small-company IR professional supposed to do? In simplest terms, investor relations encompasses the myriad of outreach activities that companies undertake to attract investors. However, reform measures such as Reg FD, as well as the sweeping Sarbanes-Oxley Act, have also attuned company executives to the fact that they need to focus not only on what they tell investors, but how they tell it to avoid any conflicts.

While no single IR mold fits all small companies, there are common issues to assess--such as whether or not to "go it alone" or utilize the assistance of outside IR specialists. According to Bushee, management can boost disclosure about the company through news wires and attempt to contact prospective investors about the stock. But while the CEO or CFO may know a lot about running their companies, they may not have as much experience with corporate communications strategies.

Avoiding the Mistakes of Going It Alone

"One common mistake that firms make when they try to do their own investor targeting is that the CEO will give one message to prospective investors while the CFO gives a slightly different message," says Bushee. "While this difference may represent slightly different visions about the company's future, investors may view such discrepancies as a red flag about the quality of management."

The professors' paper--which specifically documents the impact of investor relations activities on the market prospects of small companies--was based on a survey of 184 companies that hired 33 investor relations consulting firms between 1999 and 2004. The study also included detailed interviews with 11 of the IR firms. Three-fourths of the companies in the survey are listed on Nasdaq or the OTC Bulletin Board, and they represent 59 industries.

According to the report, the authors found that "these companies have significant increases in their disclosures [of financial and other corporate events], press coverage, trading activity, institutional investor ownership, analyst following and market valuation after hiring the IR firm, both in absolute terms and relative to a control sample matched on exchange, industry, time listed and prior investor following." By hiring an IR firm, small companies may not only get expertise in terms of what works and what doesn't, but they may also benefit from the IR firm's contacts and reputation, Bushee says.

Sharon Merrill's Calusdian says there is an inherent "Catch 22" for IR practitioners at small-cap companies that should also be considered. "While it is infinitely more difficult to attract the attention of the investment community for a small-cap company, these companies also have far fewer resources with which to reach out to the investment community," Calusdian notes. "The solution is to be as efficient as possible in targeting and meeting with investors.

"Most importantly, it is critical that small-cap IROs [investor relations officers] understand the universe of small-cap investors and their investment criteria. By focusing on a highly targeted group of investors, the small-cap IRO can be more efficient in scheduling productive meetings for management that result in real investments."

Crafting a relevant message is another important part of the equation, with continuity and consistency as key hallmarks. "Regardless of a company's size or stage of development, investors are always focused on a company's value drivers--factors that will drive the company's growth and profitability," Calusdian says.

"For example, what does the company's product pipeline look like? Or what are the industry trends that will negatively or positively affect the company's business?"

ATG's Bradley agrees that value drivers are critical parts of the message. "ATG has been around for more than a decade, but one thing that all small companies can emphasize is their competitive differentiation and their value drivers," Bradley notes. "Also, it is important to highlight your non-financial assets, such as leadership, service/product quality and corporate culture."

Bushee says his research reveals that a critical component of any small-company IR effort is the commitment of management time and energy in meeting with investors--not just during the initial "wooing" stage, but on an ongoing basis once an investor has decided to commit to the company.

Management, Communication Key

"Investors are looking for a strong, ongoing commitment on the part of management to provide information and access through thick and thin," Bushee observes. "The big cost to an IR strategy is not in terms of dollars and cents, but in terms of management time and access."

"Accessibility and consistency are key attributes, particularly as a small company continues to build on its IR capabilities," adds Steven Alexopoulos, associate director with investment banker Sandler O'Neill & Partners LP, which established its Sm-All Star list in 2004 as a means to recognize standout publicly traded banks and thrifts in the U.S. with a market capitalization under $2 billion.

An IR firm or officer is also involved in arranging meetings between company management and large institutional investors or the "buy side," as well as analysts at brokerages, or the "sell side." Calusdian says that while it is still important for small-cap firms to court the sell side, it is much more effective for management to meet directly with the buy side to tell their company's story.

"It is critical for small-caps seeking to communicate directly with the buy side to target the right institutional investors," Calusdian says. "Management needs to understand which types of investors can take a position in a company with specific market capitalization, float and trading volume. They also need to be sure that the investment criteria of the institutions they are meeting matches with their own company's financial or industry characteristics."

Specific communications tactics are also integral to the process. ATG's Bradley contends that for companies of its size, having a well-designed and informative IR Web site is important. "You have to make it as simple and as easy for investors to follow your story." She adds that ATG's management team is very responsive to all inbound investor inquiries.

Brad Rock, CEO of Smithtown Bancorp, based on New York's Long Island, says his $845 million-asset banking company made what he calls "a very significant upgrade" to the investor portion of its website a little more than a year ago. Presentations from investor conferences and press releases are easily accessible, and Rock says that the company has gone to great lengths to make sure that the information is in a "highly readable form."

Rich Sneider, CFO of Taunton, Mass.-based Kopin Corp. (Nasdaq: KOPN) says that investor conferences represent worthwhile opportunities for small-company exposure. The company, which describes itself as the largest U.S. manufacturer of microdis-plays to the consumer electronics, industrial and military markets and the world's largest supplier of HBT wafers for power amplifier integrated circuits, made a November presentation at the American Electronics Association Classic Financial Conference in San Diego.

About six analysts cover the company, says Sneider. He adds that Kopin works with an outside investor relations firm that helps company executives prepare annual reports and prep for events such as conference calls. The external input provides valuable, objective feedback that is used to hone communications skills, he says.

Sneider says his company looks at several factors in working with an outside IR firm--for example, its contacts with the business media, how well press releases are written and how knowledgeable IR practitioners are about competitors. He stresses that an important communications component of an IR practice is the ability to articulate sophisticated concepts and/or technologies in a way that's relevant to those seeking to learn more about the company.

Measuring IR program effectiveness is also a necessary and valuable exercise. While some are tempted to simply look at changes in stock price, experts say that the yardsticks go beyond that.

"We measure our IR success against our peer group," says ATG's Bradley. "We look at various criteria, including valuation, institutional ownership, sell-side coverage, trading volume and direct feedback from the investment community."

Karen Kahler Holliday is a freelance business writer in Tupelo, Miss. She can be reached at 662.840.4003.

RELATED ARTICLE: takeaways

* Changes at investment banking firms in the past few years have usually meant fewer analysts covering smaller public companies, or perhaps no coverage at all.

* While no single IR mold fits all small companies, there are common issues to assess--such as whether or not to "go it alone" or get help from outside IR specialists.

* Research suggests that a critical component of any small company IR effort is the commitment of management time and energy in meeting with investors.

* An outside IR firm can help company executives prepare annual reports and prep for conference calls, as well as provide new access channels.