Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, May 31, 2007

Taking the opportunity to communicate – not just save money

It's early days yet, but as companies consider their options under the electronic communications provisions of the Companies Act, they need to think differently about how their website delivers the contents of an ‘annual report’.

Research produced this week by Smithsinteractive - - an online reporting consultancy, suggests that few are taking full advantage of the power of the internet to create a more user friendly experience in their corporate reporting.

And this despite having lobbied hard for electronic communications.

The survey concludes that individual investors still struggle to retrieve the information they want from an annual report. As most companies still place a (large) static PDF on their site, investor organisations have accused companies in the past of simply passing the costs of printing to the investors.

This suggests that, as the survey highlights, companies are missing the opportunity to create intelligent interfaces to company’s information, or indeed versions specifically thought through for different audiences.

The opportunities are potentially almost endless. The story of the company told in video; heat maps of sales; virtual factory tours; interactive CSR data, illustrating more strongly the company’s efforts on global warming. The financials presented in a format that is easily useable in common analytical applications. The ability to create on the fly simple “what if” calculations.

The ratings that Smithsinteractive have produced show that many companies are still thinking in “print” terms in their annual report. This is very likely to change as time goes on.

And finally, as you know, transparency does matter to me. So I can confirm that the Hynes mentioned in the report is indeed related; he’s my brother. 2 communicators in one family. Whatever next.

Wednesday, May 30, 2007

Another busy week on US market’s competitiveness for listings.

The charge on making the US markets more attractive for issuers continues. The Fed, the SEC, the PCAOB and Bloomberg have all contributed to the soul searching on ways to restore New York’s pre-eminence, without compromising quality.

And in the midst of this reflection, one of the UK’s largest companies, ICI, has chosen to delist and register its DR and move to trading OTC, citing compliance costs as the principal reason.

Last week, Federal Reserve Chairman Ben Bernanke argued for the U.S. to develop a U.K.-style, principles-based, risk-focused approach in its financial market regulation.

And recently the chairman of the SEC, Christopher Cox, said the U.S. and Europe should be able to achieve a single accounting standard by 2009, with foreign issuers potentially able to cease US GAAP reconciliation.

But perhaps more urgent, the SEC has released its final guidance to management for implementing Section 404 of the Sarbanes-Oxley Act of 2002. “Our guidance enables companies of all sizes to focus on what truly matters to the integrity of the financial statements – risk and materiality,” said Conrad Hewitt, Chief Accountant. “Providing management with its own guidance for evaluating internal control over financial reporting will ensure an appropriate balance between management's evaluation process and the audit process. While the guidance is intended to help public companies of all sizes, smaller companies, which will begin complying with Section 404 this year, should benefit from its scalability and flexibility.”

And in theory to reduce costs is perhaps the unspoken message.

Meanwhile – a shock headline. Bloomberg released research indicating that the slide on new listings in US continues. But this time its personal. For the first time since the Second World War, US bankers are on the verge of earning less from initial public offerings than those in Europe.

The gap between the US and Europe is hardly noticeable: more than $1.1 billion in fees from IPOs in Europe so far this year, compared with about $1.4 billion from initial public offerings on American stock exchanges. This compares with 2002, when investment banks earned five times as much taking companies public in the US as they did in Europe.

And more impetus, if they needed it, is added by ICI’s decision to delist its ADR from NYSE, to deregister and to terminate its U.S. reporting obligations. The company believes on the basis of its hard work in enhancing governance standards, that it no longer makes sense from a cost and administrative perspective to submit to US compliance obligations. This will save it an estimated £4 million.

Which may exemplify why there is clearly a hurry-up in the changes being proposed in the US.

Thursday, May 24, 2007

Electronic trading has significant implications for IR

Without question, quantitative trading approaches - carrying names such as "black box trading," "algorithmic trading" and "statistical arbitrage" - are all the rage. Added to these approaches are terms like "pattern matching," "genetic algorithms" and "neural networks."

At the essence of these strategies are two distinct features: (1) humans aren't involved in the decision-making process; and (2) models are designed to either "learn" like humans or to detect non-intuitive relationships among a sea of data that can't be readily seen by humans. Basically, creating models and approaches that are, ultimately, better than humans because they can act faster, trade more cheaply, make decisions dispassionately, process more information and see things humans simply can't.

The rise and rise of this automated trading is causing a significant re-think in IR circles. Black box trading taken together with Exchange traded funds and basket trading are examples of processes where the stock can be bought without the thorough analysis of the underlying equity story of an individual company. This is causing a re-evaluation of traditional IR practices, as direct contact with institutional investors to profile the investment opportunity becomes redundant.

And since ETF’s, basket trading etc are traded in real time, the share price can move intra day in a significant way, unseen by the IRO and their advisors.

This is unlike regular index funds and mutual funds traded on an end of day basis, and where a fund manager is making (normally long term) decisions about investment based on established criteria. Instead, therefore of targeting fund managers, will companies increasingly rely on the media to reach out to the thousands of individual investors buying their stock in a bundled way.

Adding to the complexity is the move away from short term guidance. Quarterly single figure EPS guidance is being replaced with regular updates on the company’s strategy; market share, industry analysis, product enhancements etc.

However in a computer-traded world, to whom should this story be communicated and how? A new challenge for a new era.

Thursday, May 17, 2007

Money’s cheap; hedge fund activists fuelling record bid premiums. What’s an IRO to do?

Life has been good for those who run hedge and private equity funds. Borrowed money is cheap, buyouts are easy to pull off, bid premiums higher than since the dot com boom, and the stock markets are rushing ahead. In 2006 hedge funds increased their assets by 24% to $1.9 trillion, while private equity funds raised a record $215 billion for $1.7 trillion in assets.

Meanwhile mergermarket, the M&A intelligence and research service, has published its most recent Survey of Market Makers. Key conclusions? The debt market is expected to sustain mega-buyouts, SBOs will continue to be the most popular exit route, and shareholder activism and hedge funds are contributing to the ongoing boom. Nearly 50% of respondents see shareholder activism as a catalyst for M&A activity. And respondents believe hedge funds are increasing the competition for M&A targets.

Timely then that NIRI, the US Investor Relations Institute should publish its guide “Hedge Fund Activism: What You Need to Know and What You Can Do About It”.

In very brief summary, the guide suggests:

1. Understand where unlocked value potentially exists in your corporation, such as
under-leveraged assets; excess cash; the need for restructuring, untapped merger, acquisition or joint venture opportunities. Activist hedge funds will have already completed their due diligence before investing in your company.

2. Assess what hedge fund activists are looking for from your company. Learn about decision-making processes in individual hedge funds. Will they talk with management or do they have a history of waging nasty public campaigns?

3. Maintain accurate information on your shareholders; identify hedge fund activists. Approximately 75-100 of the 8,000 hedge funds worldwide are known activists, and only 200 firms control 75 percent of all assets. However given the limitations on public disclosures of holdings – especially of CFD’s and other derivatives (see earlier postings) - this is much easier said than done.

4. Form a rapid response team and protocol to respond. Assemble a "first response" team with a protocol that will be initiated immediately if an activist fund makes demands.

5. Communicate regularly with shareholders and gather feedback. Take these actions if your company has been identified as a target:
* Engage the rapid response team and protocol.
* Track accumulation of shares by activist hedge funds. Determine if they are acting alone or in concert.
* Review the hedge fund's previous modes of operation, tactics and outcomes.
* Analyse hedge fund demands.
* Formulate options for your company's communication strategy and messaging.
* Meet regularly with the CEO and CFO.
* Brief board members, particularly those likely to be contacted by hedge funds.
* Monitor public statements made by the fund relative to your company.

7. Immediately open a channel of communication. Articulate your response, and respond immediately; open a dialogue. A common pitfall is ignoring the activist's overture.

However the outgoing investment ace Anthony Bolton sounds a note of caution as he steps down from Fidelity; the banks who are providing much of the cheap funding fuelling the boom, are heading for disaster. It is harder and harder to find value in large companies because of this liquidity boom. Nonetheless, NIRI’s guide will provide a checklist for those in need.

Thursday, May 03, 2007

Looks like a win-win: abolish stamp duty

A lower cost of capital, the perennial concern for IRO's, would be achieved if stamp duty was abolished. So goes the argument in new research published this week by a remarkable group. Investors – through the ABI and IMA, and the City, through the LSE and City of London Corporation have joined forces to publish new research from Oxera.

The key conclusion is that abolishing stamp duty would cut companies' cost of capital, enabling increased capital expenditure, which would boost GDP by up to 0.78 per cent. This in turn would raise corporation tax by up to £4bn, counteracting the loss of £3bn of tax from stamp duty. The change would also trigger a jump in share prices, according to the research.

One potential side effect is in the bane of IRO’s lives – Contracts for Difference. The argument that many users advance in defence of these cash-settled derivatives, which carry no disclosure obligations for the purchaser outside of an offer period, is that they are tax efficient. Being exempt from stamp duty makes them particularly attractive for hedging purposes.

However, as many an IRO has found, CFD’s also allow covert stake building. Hedge funds in particular can build stakes of 4% or even greater, without telling the market. Then when an offer period commences, or management access is required, the position is suddenly revealed. Some companies believe - but cannot prove – that up to 30% of the stock is held in this form.

A major concern is also for an orderly market. If a substantial block trade appears, with no counter party, the market will operate without full knowledge of the trade – and potentially reach the wrong conclusions.

So, given that a key argument for CFD’s has been their exemption from stamp duty, will its abolition – if the Treasury agrees – lessen their use?