A strong emphasis on an investor relations strategy should help companies reduce volatility; reduce public market risk and ultimately increase its long-term value. In fact, a successful investor relations strategy, in my opinion, is one that has been in place well before investment bankers and SEC attorneys are even selected.
For example, Box priced its initial public offering of 12.5 million shares of Class A common stock at a price to the public of $14.00 per share on January 22nd of this year. It was a Hot IPO and the stock immediately ran to $25 after it began to trade. Up to this point, everything looks good. The company was able to raise some capital for future growth, the investment bankers earned their fees and investors were able to see their holdings appreciate in value.
However, the company’s stock price recently plunged as much as 14% after the company posted a greater than expected-loss in its first earnings release as a publicly company. I do not have a position in Box, however, I was shocked when I heard commentary from the company indicating the earnings miss were due to inaccurate EPS estimates due to a miscalculation of shares by some analysts.
My first thought was to think “Come on! I was born at night, not last night!” How can there be printed estimates on the street using inaccurate share counts? That’s so basic. Can it happen? Absolutely! But it should not especially for something so mundane as a share count issue. It definitely should not happen right out of the BOX on a company’s first earnings release after a public offering. It just makes everyone involved in the IPO look bad from a self-inflicted wound.
Best case investors think you do not know your own business or do not pay any attention to the street. Worst case the buy-side and sell-side think you are hiding something behind a smoke screen. In this scenario, they will focus on the negative or search for anything negative as opposed to anything positive. In fact, no sooner than the EPS miss was explained as a share count mis-calculation when I had someone send me a message asking me if I thought the company’s billings growth was decelerating. And, I don’t even cover the stock.
My suggestion to companies that plan to tap the capital markets someday is to start practicing to be a public company even when they are private. You do not want to do your dress rehearsal live shortly before a major announcement. Ideally, you have already done a dry run so many times over even as a private company the last few years that the announcement is second nature and just another day in the office.
Companies should not manage their operations to Wall Street expectations. However, it is advisable to find legal ways to minimize the potential for expectations to exceed company fundamentals. Certainly expectations should be based on forecasts using realistic data such as an accurate share count. Many companies, as an example, provide investors with as many key metrics as possible that could impact their results during their conference calls to maximize an analyst’s ability to make a more accurate forecast of the company’s future financial performance.
Make an early investment in a sound investor relations strategy reduce volatility and reduce public market risk for investors in your company. This should also translate into a lower cost of equity and weighted average cost of capital ultimately increasing the long-term value of the company.