Transcript Remarks on Raising Capital via Initial Public Offerings

Remarks on Raising Capital by
Selling Securities to the Public
John C. Edmunds
Professor of Finance
June 2, 2004
A Landmark Event in a
Company’s Progress
• When a company sells securities to the
public for the first time, the event marks a
major step upward for the company.
• The company comes to the attention of
millions of people who never heard of it
before.
• The company acquires a halo of positive
publicity.
Professor John C. Edmunds
Boston, Massachusetts
2
A Landmark Event, 2
• The company has a shining opportunity to
build on the positive image and convince
investors that it is going to become a major
participant in the world economy.
• If investors become convinced that the
company is going to deliver rewards to
minority shareholders, they bid up the price
of the company’s securities.
Professor John C. Edmunds
Boston, Massachusetts
3
Building a Reputation
• After a company successfully places its first
public issue of securities, the most
important phase of the work to build its
reputation begins.
• To build a reputation requires putting high
priority on communication, in addition to
achieving sales growth and operating
performance.
Professor John C. Edmunds
Boston, Massachusetts
4
Building a Reputation, 2
• The company’s top priorities need to
include communicating with securities
analysts, financial news media people, and
securities market regulators.
• The most important group to communicate
with is minority shareholders and
institutional investors.
Professor John C. Edmunds
Boston, Massachusetts
5
Building a Reputation, 3
• Securities analysts, financial news media
people and securities regulators will expect
to be kept up to date.
• Minority shareholders and institutional
investors will be extremely attuned to the
signals the company sends.
Professor John C. Edmunds
Boston, Massachusetts
6
Building a Reputation, 4
• If the company devotes adequate attention
and priority to managing its relationships
with minority shareholders and with
institutional investors, the company will
quickly be able to raise new amounts of
capital, and will be able to expand by
acquiring its rivals.
Professor John C. Edmunds
Boston, Massachusetts
7
Building a Reputation, 5
• Minority shareholders and institutional
investors are wary and nervous when they
buy securities issued by a company that has
not issued securities before.
• The company has no track record of dealing
with the investing community.
Professor John C. Edmunds
Boston, Massachusetts
8
Building a Reputation, 6
• Many companies assign a low-level person
to the job of investor relations. This is a big
mistake.
• Top management should devote time to this
most important job. Consultants can help
but cannot be effective if top management
does not take the matter of communication
seriously.
Professor John C. Edmunds
Boston, Massachusetts
9
Advantages of a Good
Reputation
• Companies that communicate well with
minority shareholders and with institutional
investors can sell additional issues of
securities.
• Companies that communicate well can
lower their cost of capital.
Professor John C. Edmunds
Boston, Massachusetts
10
Advantages of a Good
Reputation, 2
• In capital intensive businesses, having a low
cost of capital is a big advantage. The
company with the lowest cost of capital in
its industry sector can buy control of
competitors that have higher cost of capital.
• They can also grow from within more
quickly.
Professor John C. Edmunds
Boston, Massachusetts
11
Advantages of a Good
Reputation, 3
• Companies that communicate well with
minority shareholders and with institutional
investors can attract the most highly
qualified employees. They can offer stock
options to their employees.
• Employees will place a high value on these
stock options. They will be loyal to the
company.
Professor John C. Edmunds
Boston, Massachusetts
12
Content of the Communication
• The communication has to be timely and
accurate.
• Minority shareholders and institutional
investors always worry that the information
they are receiving is out of date or
inaccurate.
Professor John C. Edmunds
Boston, Massachusetts
13
Content of the Communication, 2
• Investors always worry that some investors
are more informed or are receiving news
before it is generally announced.
• Whenever the company has any news, all
investors must learn the new information at
the same time.
Professor John C. Edmunds
Boston, Massachusetts
14
Content of the Communication, 3
• Minority shareholders and institutional
investors are very savvy and will almost
always be able to tell if the information they
are receiving is inaccurate or if there is
some group of investors who is finding out
the new information earlier.
Professor John C. Edmunds
Boston, Massachusetts
15
Content of the Communication, 4
• If minority shareholders and institutional
investors think they are being told too late
about events, or if they think they are being
deceived, their reaction will be swift and
damaging.
• The company will not be able to raise any
more money, and the prices of securities it
sold in the past will crash.
Professor John C. Edmunds
Boston, Massachusetts
16
Protocols of the Communication
• Communication must be two-way. The company
tells minority shareholders and institutional
investors what its performance has been and what
its plans for the future are.
• Minority shareholders and institutional investors
then tell the management what they think the
company should do in the future.
Professor John C. Edmunds
Boston, Massachusetts
17
Protocols of the Communication,
2
• The company does not have to do what
minority shareholders and institutional
investors tell it to do.
• But top management must take into account
the recommendations and, if it does not
follow the recommendations, must explain
why it is not going to follow them.
Professor John C. Edmunds
Boston, Massachusetts
18
Protocols of the Communication,
3
• Top management should do road shows frequently,
traveling to financial centers to inform analysts
and investors about the company’s progress and
about its plans.
• The style of communication during these road
shows is candid and sometimes blunt. Top
management must expect this because it is
effective and people are too busy to speak
euphemistically.
Professor John C. Edmunds
Boston, Massachusetts
19
Attributes of Securities that
Investors Like
• Everybody knows that investors prefer
securities issued by companies that are
growing rapidly, are profitable, and are
innovators in “sexy” industry sectors.
• Your companies have some of those
attributes.
Professor John C. Edmunds
Boston, Massachusetts
20
Attributes, 2
• Your companies, however, are initially at a
disadvantage because of where they are
based.
• The countries where your companies are
based are high-growth, high-potential and
rapidly progressing.
Professor John C. Edmunds
Boston, Massachusetts
21
Attributes, 3
• The institutional framework is also
progressing but is still fluid. People in
financial centers like London and New York
are skeptical of the checks and balances and
regulatory mechanisms in the countries
where your companies are based.
Professor John C. Edmunds
Boston, Massachusetts
22
Attributes, 4
• Your companies will have to show investors
that they are serious about delivering
returns to minority shareholders and
institutional investors. The conventions and
regulatory frameworks where you are based
will not convince investors. You yourselves
will have to convince investors.
Professor John C. Edmunds
Boston, Massachusetts
23
Conclusions and
Recommendations
• Companies should focus on selling
securities to the public many times, not just
one single time.
• Companies that are successful in raising
capital via public issuance put top priority
on making minority shareholders and
institutional investors glad they took the
risk of buying the securities.
Professor John C. Edmunds
Boston, Massachusetts
24
Conclusions and
Recommendations, 2
• Top management should not delegate the
job of communicating with minority
shareholders and institutional investors.
• The job is very important and subordinates
cannot do it. Consultants can help but
cannot help much unless top management is
participating actively and providing timely
and accurate information.
Professor John C. Edmunds
Boston, Massachusetts
25
Conclusions and
Recommendations, 3
• Companies that make good use of the capital
markets can achieve lower cost of capital, can
finance rapid growth, and can attract and retain
key employees.
• Managing relations with capital markets is a key
determinant of success. This has been true in the
industrial countries for over half a century, and
now is also true in the emerging countries.
Professor John C. Edmunds
Boston, Massachusetts
26