Open Letter to MD’s

Open Letter to MD's.

Growing companies in every corner of the world must constantly seek out capital to fund their expansion plans.

Sometimes the capital can be generated by company profits but often it is necessary to turn to external sources.

For cultural and political reasons different solutions to the capital problem have evolved in different economies. In Asia and in many parts of Europe, growth capital has been traditionally and predominately supplied by banks. For many years this system has sufficed. World economic events of the past eighteen months, however, have given rise to the need for companies to develop alternative sources of vital capital. One extremely powerful tool to accomplish this goal is already available to Thai public companies. Luckily, it is easy and inexpensive to implement.

In the United States, companies work hard at maintaining multiple sources of capital. Not only do they work with banks and finance companies, they also make frequent and opportunistic use of the stock markets to find needed funds. At times when bank funding is expensive, selling additional stock (or making a rights offering) is often a more efficient alternative.

This strategy is evidenced by the fact that equity as a percent of total assets for SET industrial stocks (all sectors except finance, banking, insurance, property, and hotel) was about 16% as of March, 1998. A similar analysis for comparable US stocks revealed a ratio of 41%. This shows clearly that US companies place a much greater reliance on their listed stock as a funding tool compared to SET companies.

The capital structure of an American company is dynamic. As the capital markets and the banking industry go through their inevitable ups and downs, public companies simply switch to the source of capital which provides the best terms available at the time. Often, the best source of funding is banks; at other times it is the stock market. According to conditions, companies then go through cycles of re-balancing their capitalisation: as credit markets improve, companies sell bonds to re-purchase some of the outstanding stock. At other times, companies may issue additional stock in order to reduce debt, such as when banks are under pressure and are making it difficult to renew credit lines.

American companies have learned that not only is the stock market an alternative source of capital, but the price of their stock can actually become a valuable asset for purposes of executing corporate strategy. The higher the price of the stock, the cheaper the cost of additional capital. In times of economic consolidation, firms with a strong stock market presence can use their stock as currency by making opportunistic acquisitions of other companies or lines of business through the issuance of stock to the sellers instead of payment in cash.

To date, many SET companies have not viewed the public stock markets as a viable source of ongoing capital. In view of the potential for future credit shortages, however, it would do well for Thai companies to consider the opportunities available by using their listed stock as a regular tool in the financial management kit.

In order to accomplish the ability to readily raise growth capital through the sale of stock, American companies have developed a two-pronged marketing strategy: not only do they market their products to customers, they also continually market their company's stock to the investment community. The good news is that this is easier than it sounds. These companies are merely taking advantage of the fact that investors are willing to pay a premium price for stocks that they can easily understand. All that is needed to create good understanding among investors is for listed companies to be responsive to investor's need for timely and accurate information.

Here is the basic formula:

• Assign an "Investor Relations Officer" whose job it is to deal with investors, both those who call and those who visit the company in person. This takes a burden away from the President and other senior officers and focuses the effort with one individual. That person must be knowledgeable about the company's business and its financial statements in order that he or she can provide accurate answers to investor questions. The IR Officer will agree ahead of time with other senior management as to exactly what can and cannot be discussed with investors. International securities analysts, for example, will ask many probing questions, but they will understand and accept that certain information is confidential and cannot be publicly discussed. Also, the IR Officer will be careful not to disclose information that senior management has not yet made publicly available.

   

• Develop an "investor relations package" that can be mailed to investors who request information. Such a package might contain recent financial reports, favourable newspaper articles, favourable brokerage reports, copies of recent press releases, and other promotional materials about the company. It may be worth the expense to also serve foreign investors; after all, it is unlikely that there will be such a demand from foreigners that it becomes a meaningful cost item for the company. Again, the goal is to communicate the company's image, goals, and future prospects. The company should be happy to tell its story to anyone willing to listen.

   

• Have the IR Officer, and perhaps other senior officers, make courtesy calls on brokerage firms. Make sure the brokerage community understands the company's business. Give the analysts an opportunity to ask questions and to get excited about the company's prospects for the future. Alternatively, invite brokerage firms to the company headquarters for tours, new product demonstrations, plant openings, and so forth. Positive words about a company from an analyst at a brokerage firm can add considerable strength to a company's stock.

   

• Establish a corporate Internet web site that has an Investor Relations page, which contains recent financial data, recent news announcements, etc. The visitor to the Web site of any publicly listed US corporation will find such a page available. The Web site is an excellent, and inexpensive, way to communicate with investors.

   

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One of the principal goals of the investor relation's person is to establish communication with stock analysts. These investment professionals serve as the company's best link to investors around the world.

In general, securities analysts are those investment professionals who are charged with investigating the present and future prospects of public companies on behalf of investors. They may work for a local or international brokerage firm, a mutual fund, a professional investment research company, or a foreign financial institution that has money to invest. Among other tasks, they spend a great deal of time making independent projections about the future earnings of public companies. Using these projections, they assess the "fair market value" of the company's stock. They then make recommendations to their firm or its customers to buy or sell based on these presumed values.

Each quarter, as interim financial results are published, the analyst will adjust his or her valuation estimates based on changes in the financial condition of the company. One key function of the Investor Relations Officer is to assist, or "guide", the analysts in making their projections for the company. A game is often played whereby, in an interview, the analyst will present his or her projections to the company. The company then reacts by agreeing that the projections "look reasonable" or "look a bit high", or "seem perhaps a little low". Because analysts are judged on their ability to forecast, assisting the analysts in this way earns their appreciation and their trust.

On the other hand, analysts who receive unpleasant surprises about a company's affairs tend to become very cautious about saying positive things about the company to their clients in the future. In the US it is a fact that the more the brokerage community knows about a company and its prospects, the stronger will be the stock price. Establishing and maintaining communication with stock analysts is the key.

The good Investor Relations Officer is skilled at making new friends for the company among members of the financial community. Communications with analysts must be looked upon as an opportunity - not as a threat. While the inquiries of investors and brokerage analysts could be viewed as an intrusion into the company's private affairs, the situation can easily be turned around so that investors receive information in the way that the company wants it to be perceived.

Having made a decision to use the stock markets as a capital tool, it may also be desirable to review the company's accounting and reporting practices. For example, many Asian companies have as a corporate goal the minimising of taxes. This often means that accounting practices are biased toward conservatism and underreporting of the company's true earnings. For example, a study of Japanese companies showed that due to the liberal use of reserves as a means of limiting corporate taxes, Japanese earnings were understated as much as 40% compared to international accounting standards. In the New World of finance, however, the benefits of aggressively building earnings growth, and thereby creating a strong presence in the stock market, far outweigh the cost of additional taxes that may result.

Some may consider this process of "investor relations" to be nothing more than shameless self-promotion. On the contrary, in the world of investments, it is viewed as good business practice. Just as a company will spend a great effort at marketing its product to potential customers, it must also make an effort to market the value of its public stock to the consumers in the investment community.

The development of a comprehensive plan to sell the company's image to the financial community will pay big dividends. The value gained relative to the cost is extraordinary and should be a goal of every Thai public company.

Best Regards,

Paul A. Renaud