Treasury & Risk's 7th Annual Alexander Hamilton Best Practices Summit — October 1 and 2, 2002
2002 — Investor Relations Winners: Gold—Cisco Systems; Silver—MDU Resources; Bronze—Tektronix
OVERCOMING THE MARKET'S PERCEPTION
Cisco Systems strikes gold
GOLD INSURANCE WINNER—For Cisco Systems Inc.’s investor relations managers, the problems began in April 2001 with the collapse of the telecommunications sector. Cisco managed to stay slightly ahead of the pack, although its stock price clearly suffered too. That tough period was followed by revelations about Enron Corp.’s accounting chicanery in the fall of 2001. Not too many months later, bombshells about WorldCom, Global Crossing and Qwest—scandals that hit much closer to home—dropped. Cisco found itself getting painted with the same brush as a lot of erstwhile high fliers, particularly those in telecom. Even though media scrutiny of the San Jose, Calif.-based company’s accounting and business practices yielded nothing, it didn’t seem to matter.
Investors were making decisions based on perceptions of the industry and not the reality about individual companies. Cisco’s stock price dropped nearly 30% to just over $14 a share at the end of February from over $19 at the start of the year. Despite historically strong relationships with shareholders, some of its largest institutional investors began to desert, while others were voicing increasing confusion about information in the company’s financial statements. On top of that, a slew of new regulations put forth by every organization from the Securities and Exchange Commission to the National Investor Relations Institute only heightened investor anxiety over whether companies were on the level with their numbers.
Cisco’s investor relations group didn’t sit idly by. Instead, it launched a three-pronged strategy. First, IR reached out to its investors to find out their top concerns. They discovered confusion about deferred revenue and the use of pro forma versus GAAP and a need for more cash generation and use-of-cash information.
The next step was to better coordinate the company’s financial information inside the company to ensure that the data was understood clearly internally and thus could be efficiently distributed externally. The third step was to modify how financial information was distributed through the company's 10-Qs and conference calls, paying close attention to better disclosure of commitments and contingencies, reclassifying more accurately its revenue picture and taking several steps to eliminate confusion about GAAP and pro forma numbers. As part of that, Cisco also decided to include PowerPoint slides in its Webcasts, which run simultaneously with the conference calls.
Finally, the work done to raise the comfort level of investors also persuaded Cisco to acquire all of its properties that had been financed through off-balance sheet synthetic leases—even though the company disclosed the leases’ existence in its filings.
It appears the strategy has worked. For the fiscal third quarter, Cisco registered a 3.5% decline in its stock price on the day the company released its results—consistent with industry performance for that period. And on the day after the results came out, the stock shot up 20% to $16.27.
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SILVER INSURANCE WINNER—MDU had gone from being a pure electric utility in the 1920s to a diversified energy company with $2.2 billion in annual sales last year. The problem: The investment community didn’t seem to appreciate fully the Bismarck, N.D.-based company’s transformation. Even though the company during a 10-year period posted annual revenue growth rates of around 22%, MDU executives didn’t think the company was getting the recognition it deserved from institutional investors.
MDU’s management determined that what it needed was to spread the word about the company’s current scope—everything from natural gas collection and development to construction materials supplier—and its future growth strategy. The next step was to identify key buy-side and sell-side analysts who could help take MDU’s message to investors. CEO Martin A. White, CFO Warren L. Robinson and three divisional presidents met face-to-face with more than 700 analysts, brokers, investors and shareholders to discuss the company’s current health, tout its business plan and lay out where the company was heading.
The strategy worked: MDU’s stock price advanced 114% between March 1997 and March 2002 to $31 a share (it has since slipped to around $23); the number of analysts who cover the company jumped to 17 from nine and institutional holdings of MDU shares climbed to 32% in March from 20% five years earlier.
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BRONZE INSURANCE WINNER—It was the spring of 2000 and Tektronix had just sold its printing and imaging division to Xerox Corp.—effectively halving the company's revenue base. The Beaverton, Ore.-based company, which reported 2001 revenues of $1.2 billion, was now solely in the business of selling test, measurement and monitoring instruments for the communications and high-tech industries. But its investor base still reflected that of a company with a printing business, and the frequent buying and selling of Tektronix's stock by these aggressive investors led to wild price swings. On top of that, the number of sell-side analysts who followed the new company had shrunk to what the company called a “dangerously low level” and they lacked the technology background needed to understand Tektronix's new world order.
The upshot was that the company needed to change its investor base and bring in a better-suited cadre of Wall Street analysts to follow the company. To do that, it launched a two-pronged strategy. First, the investor relations team approached and educated sell-side analysts about Tektronix's measurement business. The next phase involved building a list of 100 institutional investors that the company felt had a longer-term value-investing approach and contacting those buyers.
The efforts have paid off. While Tektronix had set a goal of adding two sell-side analysts to its roster within a 12-month pe-riod ending this past spring, the company wound up adding four to bring the total to 13. On the investor side, the company was able to dominate its buy-side mix with value investors, which now comprise 78% of the institutional investors holding Tektronix shares.
—As seen in the October 2002 issue of Treasury & Risk magazine