Almost since the dawn of the ticker tape, companies have relied on the same tools to lure investors: whiz-bang press releases, rubber-chicken lunches, and the occasional corporate road show. Such efforts may bring investors in, but they haven't done a good job of keeping them for the long run. Companies have learned to their chagrin that for many big shareholders, the long term lasts until the next quarterly earnings report.
But now, a growing number of companies are radically changing the way they present themselves to big investors. With the help of sophisticated data bases, they're employing new techniques to identify or "target" institutional money managers they would like to have as shareholders. Then they make a strong pitch to those prospects. "We've gone from a scattergun approach to a rifle shot, and now we're finding institutions we truly want to be our investors," says Russell J. Page, senior vice-president of NationsBank.
Targeting is a quest for "patient" capital--shareholders who will not dump their stock for want of a few cents a share on an earnings report. Companies try to identify institutional investors that already back companies with similar characteristics. In theory, at least, that means these investors will "understand" the company and be more willing to stick it out through good times and bad.
Of course, most of these companies are not selling new stock directly to institutions. But in luring pension fund and mutual-fund managers into buying their stock on the exchanges, these companies hope to increase the price of their shares. That makes existing shareholders happy, and just as important, a high stock market valuation can give a company a competitive edge. A company's cost of capital is tied to its stock's price-earnings ratio: the higher the p-e, the lower the cost of capital. Lower capital costs allow companies to pursue projects and ventures that higher-cost competitors can't.
Targeting shareholders is a cottage industry, but it is booming. A half-dozen consulting firms have signed up more than 500 companies, including Baxter International, MCI Communications, Playboy Enterprises, Texaco, and Xerox. "Instead of trying to be out there with 4,000 investment clubs and 4,000 institutional holders, companies can go to just 50 targeted investors," says Joe Shenton, a targeting consultant whose OLC Corp. will ring up $5 million in revenues this year from 136 clients. Shenton says clients in 13 different industries have been able to identify nearly $3 billion in stock purchased by targeted investors.
ECLECTIC BUNCH. The desire for more patient capital is what led athletic wear manufacturer Nike Inc. to start targeting three years ago. Nike officials were concerned that institutional investors seemed to be trading the stock rather than buying for the long term. The result: volatility in stock price and in the shareholder rolls.
To find more long-term investors, Nike turned to OLC. The consultant, tapping a vast computer data base, compared Nike's financial performance and projections with 13,000 domestic and foreign companies to find those with similar characteristics. At first blush, Nike's peer group was surprising--a diverse list that included Boeing, Hershey Foods, Liz Claiborne, and Nordstrom. Yet according to OLC's analysis, the companies shared similar characteristics such as return on capital and earnings growth rate. A list always emphasizes companies in different industries, since institutional investors usually want diversification--not more of the same.Once OLC identified the Nike peer group, they examined the holdings of institutional investors to find those who had some of the peer-group stocks. From that, OLC developed a list of 50 institutions deemed good prospects because the investors used yardsticks against which Nike would measure well--especially discounted cash flow and earnings momentum.
The search paid off. Today, after a host of one-on-one meetings with fund managers in 12 cities, 52 targeted institutions hold 23% of Nike's stock. And the program is ongoing, as Nike is always on the run for new shareholders. "When we contact our targets, they've already invested in companies that are similar to us. We're speaking their language," says Ronald A. Parham, Nike's director of investor relations. Parham says the strategy really proved itself last year, when Nike's stock was hammered by rumors that its inventories were out of control. True, some institutions, such as Chancellor Capital Management Inc. and Jennison Associates Capital Corp., dumped the stock, but most targeted shareholders who bought in are still on board. "Now we have a relationship that's been tested over time," says Parham.
TOUGH CROWD. Nike figures its program has contributed to the recently robust stock price of $78 and the fact that the company is trading at nearly 18 times earnings, compared with 11 for Reebok International Ltd. One of Nike's biggest institutional holders concurs: "They're starting to market to Wall Street the way they market their sneakers," says one fund manager.
Targeters go beyond data bases to develop leads. They're also using "market surveillance" techniques to spot changes in institutional shareholders. Consider Harris Corp., an electronics company that posted strong third-quarter profits. After the announcement, its targeting consultant, Carson Group, spotted new institutional investors moving into the stock. From that information, the consultant was able identify like-minded money managers that Harris could approach about becoming a shareholder. "You've got to identify trends, rhythms, and patterns in the market that tell you who's getting in and out of your stock," says David M. Geliebter, senior partner at Carson. "That's how you know where your next target is."
There are traps in targeting, too. Geliebter recalls a company that had successfully pitched itself to several state pension funds. But management was furious when its annual meeting time came around and the company was faced with several antimanagement proxy resolutions put forth by its new shareholders. Even though management beat back the proxies, the investor relations officer lost his job. "You have to be careful of institutions that have firm, set policies," says Geliebter. "Once they're in your stock, they're going to take a very firm stand against you if they have to."
As the trend toward targeting continues, that's a risk that more managements may have to face. But it's a small price to pay to attract investors whose notion of a long-term investment goes far beyond the next earnings report.
FINDING FRIENDLY SHAREHOLDERS BAXTER INTERNATIONAL Has attracted more than $500 million of stock purchases by targeted institutions in less than one year DOW CHEMICAL Had a hard time keeping investors because of the chemical industry's cyclicality. Seeking longer-term shareholders, Dow has held 50 one-on-one meetings with specially selected money managers this year HARRIS After a strong third-quarter earnings report, Harris employed 'market surveillance' techniques to spot buying by institutions. Company then started pitching itself to money managers with similar investment goals NATIONSBANK Of 105 money managers courted by the bank, 70 bought the stock. These new shareholders were also big investors in the $382.5 million secondary stock offering held in February of this year NIKE Started a program in 1989 to attract institutional investors that will hold its stock for the long run. Such investors now hold shares worth about $570 million, and make up about 23% of all the company's institutional shareholders DATA: BW