Does it Pay to Go Public?

IPORecently, a client pointed me in the direction of a very interesting Inc. article about the case for staying private. The author is the CEO of a privately held, family-controlled tech business, one that has name cache. He notes that being a public company is expensive and time consuming. He also believes that “the most critical benefit of staying private is the facilitation of a true focus on long-term goals.”

It’s not hard to argue that Wall Street is increasingly focused on short-term results, but does that mean that management teams need to adopt the same mindset? Maybe it’s a naïve belief, but some would say that if the stock market is working as it should, a company’s share price will reflect the company’s true value over the long-term.

The New York Stock Exchange predicts a busy year for IPOs in 2014, with about 150 to 200 new issues expected. Reuters points to first quarter IPO activity of $47.2 billion, a nearly doubling from this time last year and “the strongest annual start for global IPOs since 2010.”

Clearly, there are CEOs who still believe in taking their companies public, many in the technology sector. Perhaps they are in it for a large personal pay day, but perhaps they realize that it could be easier and less expensive to raise capital to realize their growth plans. Or perhaps, their Fortune 500 client base requires audited financials as a condition for doing business together.

The decision to go public is not an easy one, and it’s a decision that every company must weigh very carefully. If you’re contemplating an IPO to become like Hooli, the fictional tech company featured in the new HBO series “Silicon Valley,” it may not be the right move. But if you’re doing it to build something that can have a lasting impact, it might just be. Just make sure you surround yourself with good advisors to ensure a smooth process.

— Laurie Berman, lberman@pondel.com

Remember the game, Telephone?

Prepping for Investor Conferences

With the 2014 investor conference season about to go bananas (J.P. Morgan’s behemoth healthcare conference hits Jan. 14), it is probably a good idea to do a little prep work before spending all that time and money on the road.  Think of it like going to sleepaway camp; you got your sunblock, check, bathing suit, check, toothbrush, check, compelling investor presentation, um …
 
OK, so unless you were the ultimate dork at summer camp, you probably didn’t bring an investor deck with you.  The point is it is absolutely critical that you have the right mindset and materials before you embark on the conference circuit.  Following are a handful of tips to consider:
 

  • Make sure your investor presentation reflects the kind of company you are right now.  Many of us get attached to clever graphics, analogies and even metrics that are no longer relevant to a story.  A few substantial tweaks could make all the difference when it comes to keeping investors engaged.

 

  • Manage your one-on-one schedule.  It is easy to feel pressured by your hosts to sit with everyone on your schedule, but not all of the folks who want to sit with you are interested in investing in your company.  Some are looking for industry trends or even making a bet that your company’s stock is headed south.  Bottom line: Keep a close watch of your schedule and feel free to say no and request a new meeting.

 

  • Piggyback NDRs.  Traveling is expensive, not to mention time consuming.  So, if you’re headed across country, let’s say to NYC, perhaps it makes sense to also do a day of meetings in Boston or Philly.  Or better yet, maybe an analyst from a different bank would like to set up a dinner in NYC after your conference.

 

  • Sleep well and eat right.  OK, I’m an IR guy, not a nutritionist.  But I’ve seen it before, the executive who has been up all night working, eating crappy food, and throwing back one too many glasses of scotch.  And then comes the investor presentation, at which point you can hear all of the air being sucked out of the room because the speaker has no energy.  I’m not saying stop drinking scotch, but I am saying it’s important to take care of yourself.

 

  • And finally, take notes and ask questions.  We usually assume that investors are the ones asking all of the questions, but maybe there is some insight to be gained if management teams ask investors questions.  Investors sit with hundreds of management teams and likely can impart a few nuggets of their own.

 
— Evan Pondel, epondel@pondel.com

Will Hedge Fund Advertising Affect Brand Cache?

Just recently, the SEC lifted its ban on alternative investment vehicles advertising to the general public as amendments to Rule 506 of Regulation D, and Rule 144A went into effect on July 10.
jobs.

 

Mandated by the Jumpstart Our Business Startups (JOBS) Act, these new rules will make it easier for companies and private investment funds to raise capital by engaging in broader communications and marketing efforts. The only hitch is that these issuers take reasonable steps to verify that purchasers of the securities are accredited investors.

 

Without getting into the legal ramifications of what constitutes “reasonable steps to verify,” although securities law firm Paul Hastings does a pretty good job of highlighting some of its key elements, the new rules seem to be a positive step for hedge funds and alternative investment vehicles looking to capture freed-up investor cash as a result of the economy’s turnaround.

 

Changes to these rules have been in the works since April 2012, when the JOBS Act was signed into law. While some alternative investment funds already have been exploring advertising options, very few have rolled out larger marketing or branding campaigns. (Pictured right: Agriculture Secretary Tom Vilsack of the United States Department of Agriculture explaining the American Jobs Act.)

 

Not everyone may look at the new rule as a positive change. The exclusivity of these types of investments has created a certain cache among would-be investors, sort of like a country club-atmosphere, allowing only those with the “right” pedigree to gain access.

 

Maybe this is an extreme analogy, but there is some truth in jest. It’s probably a safe bet to say that an established $10 billon hedge fund may not be putting up a Facebook page. However, newer or lesser-known funds will be using the new rules to generate brand awareness among qualified investors. The result will force many of the firms not wanting to advertise to do something, especially since they will be overshadowed by funds that are marketing their investments more broadly.

 

Therein lies the quandary. Too much marketing will create brand dilution that will negatively affect perceptions among existing and prospective investors. Too little advertising just won’t generate attention. Finding the right mix of traditional and social media will be the correct strategy, although this will be extremely difficult in today’s Internet-based media landscape.

 

Positioning fund managers as experts across financial media and investor platforms sounds like an effective strategy and a good place to start, so does an ad in Forbes or the Wall Street Journal. The key here is to create or maintain cache. Otherwise, we’ll see more funds commoditized, possibly even banner ads on Google touting the latest alternative investment vehicle. Ok, maybe a stretch, but let’s see what happens anyway.

 

— George Medici, gmedici@pondel.com

 

 

Industrial Might to Fiscal Blight

The financial collapse of Detroit is certainly sad, Detroit as the home of Motown now has the dubious honor of being the largest American city ever to seek bankruptcy protection in court. What’s even sadder is that the fiscal realities of this once proud city were ignored for so long, its demise was death by a thousand cuts.

 

Detroit’s woes didn’t happen overnight. It started in the early 1970s when the foundation and builder of the city, the car industry, took a one-two punch from the oil crisis and a deep recession. This opened the flood gates for a mass exodus from the city and the population began falling sharply. As Detroit residents began to flee the city, the tax revenue, of course, went with them. A city of 1.8 million in 1950 is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

 

By all accounts, the head-in-the-sand mismanagement of politicians and union officials is well documented. For decades, it seems, the fiscal numbers set off alarms bells, but in a political philosophy that has become all too commonplace, Detroit’s leaders lived in a state of denial, kicking the can down the road, hoping that some magical solution would suddenly appear, instead of admit that the city was dying.

 

It’s a harsh truth, but Detroit got what it deserved. It has been taking on water for decades and was feckless in plugging the holes. Bankruptcy is a painful chapter in Detroit’s story, but it is, as the governor of Michigan said, also an opportunity to stop 60 years of decline.

 

Let’s hope that Detroit, and other municipalities flirting with the same issues, remember the past so they’re not condemned to repeat it.

 

— Ron Neal, rneal@pondel.com

Investor Communication Gets Creative

Lotta Value.jpg

Cheers or jeers for Loews?  The holding company that provides business insurance, operates hotels and produces energy, recently stepped outside the box and created a comic strip to connect with investors.  With such a diversified business, it may make sense that Loews is testing new communications methods and aiming to simplify its message.  Or does it?

According to a recent BloombergBusinessweek article, the idea came to CEO, Jim Tisch, during a discussion with Loews’ annual report designer, during which he was considering a more engaging way to present company information versus more typical (and some may say tedious) measures. The Adventures of Lotta Value, Investment Hunter!” is meant to help retail investors decide whether to invest in Loews. The comic takes readers on a journey to find the key to the company’s success, which is “tucked away in vaults at each subsidiary.”

Loews is not the first company to experiment with catchy means to speak to external audiences. In conjunction with its 2012 user conference, dubbed SuiteWorld, NetSuite President and CEO Zach Nelson, and Founder, Chief Technology Officer and Chairman of the Board, Evan Goldberg, utilized a humorous video to discuss the company’s business.

What’s next? “A organ opera reporting on its latest fiscal year, a Facebook poetry slam, an IBM string quartet, or an Herbalife ballet,” pondered Stanford Law School professor and a former member of the Securities and Exchange Commission, Joseph Grundfest, in the BloombergBusinessweek article.

As long as public companies continue to use formal and approved outlets for disclosure of material information, finding an effective way to fight through the clutter and noise, and make investors smile along the way, deserves a big cheer from me.

 

Laurie Berman, lberman@pondel.com

Is Executive Compensation a New Marketing Ploy by Law Firms?

While the days of being “Lerached” are thankfully long gone, a new potentially litigious trend in the public company world seems to be emerging.

CEO Pay

 
This time the subject is executive compensation.  And unlike
those days prior to the infamous class-action lawyer William Lerach getting “Lerached”
himself, this time more than one law firm may be joining the fray.
 
I’m not one for being an alarmist, so don’t start worrying yet.  But one never knows, and perhaps PW Insight will be breaking this story first.  Just be aware that after two years of Say-on-Pay being part of the proxy lexicon, it seems that suddenly a number of law firms are launching “investigations” into potential breaches of fiduciary duties by boards of directors, seeking executive compensation approval.
 
Funny thing is that while the law firms are writing directly to these companies, they also are issuing press releases over the national wire services.  So far that we can tell, no company has publicly responded to the allegations.  And they shouldn’t.
 
All of the press releases we have reviewed thus far appear to use the same copycat language. They also have embedded links for interested shareholders to contact these law firms with words like “protect your investments, free of charge,” not to mention “Attorney Advertising” posted on the bottom of each release. Kind of a sick way of soliciting business, don’t you think?
 
While the 2013 proxy season is still far away, and perhaps nothing will come of this, public companies nevertheless must pay attention.
 
According to a recently published paper by law firm Paul Hastings titled, “Staying in Front of Shareholder Litigation Challenges to Executive Compensation,” nearly 80 companies failed to receive majority support on executive compensation since the Say-on-Pay rule was enacted.  The paper concluded that executive comp issues are “poised to escalate” and advised that companies should consider strengthening reliance upon the advice of independent, outside consultants by adapting “new corporate best practices” and engaging separate, independent compensation consultants for both the compensation committee and the board.
 
Everyone’s trying to be innovative in making a buck these days. Hopefully, however, we will not see the return of Lerach-style tactics as part of the marketing process.

 

Roger Pondel, rpondel@pondel.com
 
 

Dow 20,000? From Bernstein’s Lips to Everyone’s Ears

Dow Jones Industrial Averages for the 2000s

I had lunch earlier this week with Ryan Martinez, a savvy, Los Angeles-based financial advisor with Alliance Bernstein, one of the nation’s most highly respected portfolio management firms, who told me his chief investment officer predicted that the Dow Jones Industrial Average will hit 20,000 in the next five to 10 years.
 
If the prognostication came from a brokerage firm, a cynic would  say the forecast was  biased, unveiled to spur more demand of  stock buys generating larger commissions.   But Bernstein is not a brokerage house.  They are in fact the  purchasers of equities and not stock sellers.
 
“Our projected stock returns may sound optimistic, but they are not,” wrote Seth J. Masters, chief investment officer of Bernstein Global Wealth Management, in a position paper. “They are well below the long-term average for U.S. and global equities and are based on conservative assumptions about economic and market conditions.”
 
Even though interest rates are at historic lows, institutional and individual investors nonetheless have been rapidly moving their capital to cash and bonds and away from equities. So maybe now, or soon, it is time to take the less-traveled  road, despite the unsettling news we read every day about the shaky economy.
 
Martinez, always the voice of reason, told me that the 20,000 Dow projection “in no way reflects short-term positioning.  It’s hard to time the market, and you don’t want to be extreme on either end of the spectrum.”
 
The cynic in me thinks Alliance Bernstein may be  using its clout and media know-how to start a rumor, albeit one that we all hope is true and becomes a self-fulfilling prophecy.  But these are smart folks, their hypothesis seems sound and conservative, and their prediction is receiving widespread publicity, including a Sunday column in the NewYork Times.
 
So all I have to say is …  From Bernstein’s Lips to Everyone’s ears.

 

Roger Pondel, rpondel@pondel.com
 
 

Bankruptcy’s Impact on Brand Perception

Largest Bankruptcies

20 largest bankruptcies of 2012 (Source: Good.is)

San Bernadino this week became the third California city in the last month to seek bankruptcy protection because it could not close a $45.8M budget gap.  Similarly, Stockton and the small resort town of Mammoth Lakes both sought financial protection due to large budget deficits.
 
Lack of funds is the primary reason for the filings.  Basically, these municipalities are spending
more money than they actually earn from taxes, fees and other revenue.
 
According to the Administrative Office of the U.S. Courts, bankruptcies in the U.S. have more than doubled from 2007 to 2011, topping its highest point ever at 1,571,183 filings for the year ending March 31, 2011, although 2012 saw a 13 percent drop over last year.
 
The soured economy certainly impacted the rise in bankruptcies.  While the ability to secure credit may be hampered, and for cities like San Bernardino, bond ratings may be downgraded, the question remains: Does bankruptcy have the same negative brand impact it did a decade ago even in today’s soured economy?
 
Take General Motors for example. The company filed for bankruptcy protection on June 1, 2009, the fourth largest in the nation’s history.  The brand initially took a big hit in the media and financial markets.
 
GM however quickly emerged from bankruptcy only 40 days later with the help of the U.S. Treasury and recently announced June 2012 sales of 248,750 vehicles in the U.S. alone, the company’s highest since September 2008.
 
General Motors today is a company with a new, reinvigorated brand identity.  Yes, new vehicles, increased revenues and good earnings help.  It’s sometimes hard to remember that only a couple of years ago the company was on the brink of financial disaster.
 
The key to success is effectively managing communications during the bankruptcy process.  At the time of the Detroit automaker’s bankruptcy filing, GM’s CEO Fritz Henderson promised that the fallen corporate giant will be reformed and that “business as usual is over.”
 
The strategy seemed to work. Making sure all audiences are informed of a company’s reorganization plan is essential for success. Bankruptcy is not permanent, but a tool to help protect companies and individuals from creditors while a restructuring is put into action.
 
So, the answer might be that bankruptcy does not have the same negative connotation it once had given today’s uncertain marketplace.  Done right, the results can be positive and even generate new investment opportunities.  Done wrong, the repercussions can be disastrous.
 
All eyes now are on Scranton, Pennsylvania.  The cash-strapped city last week cut the pay of its municipal workers to $7.25 an hour and might be the next local government to declare bankruptcy.

 

George Medici, gmedici@pondel.com
 
 

Sunday Mornings May Never Be the Same

My favorite part of Sunday morning is relaxing over a cup of coffee while leisurely reading both the New York Times and Los Angeles Times–every section–without that harried feeling of having to skip and skim stories like I do the rest of the week, or use the speed reading techniques I learned from my 11th grade English teacher, Mr. Coughlin.

The Times-Picayne (Photo Source: wikipedia.com)

 
I even savor the smell of the newsprint, which combined with the coffee aroma, exudes a state of calm. But I am worried that the Sunday papers may not be around too much longer. And while the thought of sipping coffee with an iPad doesn’t exactly thrill me, I am reluctantly bracing for the future. Of course, it’s all about technology, which is changing our lives–granted, mostly for the better–and changing the media landscape at breakneck speed.
 
Within the last couple of weeks alone, The Times-Picayune in New Orleans told the world it will be cutting back its print editions to three days a week.  That same day, three other newspapers followed suit.  Like a tsunami, a few days later, a Canadian newspaper chain, Postmedia, announced that its three newspapers will be eliminating their Sunday editions.
 
These were not the first such actions, of course, but the pace of such change seems to be picking up speed.  The shift to online news certainly makes sense from an economic point of view. It’s just that it makes me sad and I would think that there are others like me that feel the same way.
 
But it’s not just about relaxing with the paper on Sunday mornings. It’s quality of content, as well as
quantity, with lost columns and generally fewer investigative pieces and features.  And add to that, perhaps saddest of all, is lost jobs.  When the change takes place at The Times-Picayune, expectations are that about a third of the journalists will be cut.
 
I’d like to think that in the biggest U.S. cities we’ll always have our Sunday papers.  But I guess
there’s a good chance that we will not. So as my psychotherapist wife repeatedly tells me, enjoy the moment. Sunday mornings may never be the same.

 

Roger Pondel, rpondel@pondel.com