The Implications of Market Volatility: Beware the VIX

While market volatility irks investors, those with the most at stake may ironically be the many pre-public companies that have long awaited their turn to tap the equity capital markets.
 
There’s no question that 2013 has seen a general improvement in the deal market, but some investment bankers are now privately expressing concerns. “Deals were getting done more easily earlier this year, with the VIX below 15 for most of this year,” one recently told us, referencing the trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility.
 
Often referred to as “the fear index,” the VIX measures the market’s expectation of stock market volatility over the next 30 day period. “If the VIX stays at the current higher level, the window for equity capital closes for all but the best offerings,” he solemnly added.
 
The VIX measure has been steadily building since the end of May, and is now in the range that some investment bankers and syndicate managers say suggests a shift in investor psychology, resulting in reticence to take on additional risk, as is inherent in initial and follow-on public offerings.
 
While the VIX has previously spiked and subsequently retreated to happy levels a couple of times already this year, should the build-up be a harbinger of sustained volatility and a tougher deal market, public companies would be wise to consider these related investor relations implications:
 

1. Investors seek comfort in a storm.  And nothing creates that comfort like familiarity with management.   It’s a great time to grow investor relationships in person.

 

2. It’s easier to get attention.   With buy-side researchers less distracted by disappearing deals, old fashioned stock picking is back in style.  Success shifts to sell-side analysts and firms delivering differentiated ideas, while adding value through corporate access to select managements.

 

3. The predatory order is largely determined by currency strength. “Currency” in this case being the company’s common stock.  Along with balance sheet strength and other company-specific factors, companies exhibiting the strongest stock valuations often become the consolidators of their industries.  They can come to dominate by acquiring attractive pre-public companies from VCs that can’t await an IPO, as well as through accretive stock mergers that offer potentially tax-advantaged exit strategies for key owners of acquired public companies.

 
Market volatility that signifies a shift in psychology may well make it tougher to go public. But it could soon be the best of times for public companies, and particularly those that have struggled to command investor attention in a deal-driven market. Astute managements will recognize the opportunity, hone their messages, and step up their investor relations efforts accordingly.
 
 
Mark Lamb, mlamb@pondel.com