IROs Focus on Tools to Confront Activists and Obtain Reliable Market Intelligence
15 October 2015
By John Vogt
Investor relations professionals are notable for being a particularly collaborative group. They spend significant time each year acquiring and sharing information in a variety of venues, and don?t hesitate to swap ideas and offer best practice suggestions in person at conferences, online, and even fielding phone calls from fellow practitioners seeking input. This kind of collaborative spirit helps the profession continually adapt and move forward, to the benefit of public companies and their shareholders.
September and October are especially busy times for conferences and educational forums. Last week I was fortunate enough to participate in two such sessions in New York, the IR Magazine East Coast Think Tank and the Citi Depositary Receipt Services Investor Relations Academy.
Among the most discussed topics were two that have seen rapid change in the past few years: investor activism, and the disappearance of the kind of information about companies’ stock trading that has resulted from regulatory and technological change. In each case, a common point that emerged from the discussions was the need for new tools and strategies for the IR officer to have at his or her disposal on both the tactical and strategic levels.
While the two topics are different in nature, they intersect at a key point: gaining as much intelligence as possible about how your stock (and often options) is trading is a tactical tool that helps provide the time to enact proactive strategies to deal with the eventual emergence of the activist investor.
The two topics are also related by history: some of the earliest attempts to develop market intelligence or stock surveillance services arose as a function of the need to confront activism and so-called ?greenmail? investors in the late ?80s and early ?90s. From there, stock surveillance evolved to become a widely-used tool among IROs for everyday intelligence about trading and shareholder movement, as well as an important component of crisis management.
I had the opportunity to describe for IROs at the two venues the changes in availability of information under new market structures, and how good market intelligence tools have evolved to help IROs navigate the new landscape. I contrasted market structure prior to the changes driven by regulation and technology, and that of today.
Best practice for stock surveillance always included a laser-like focus on trading, gathering information from the specialist for NYSE stocks and, to a lesser extent, NASDAQ?s Market Intelligence Desk. An experienced analyst could, on behalf of his or her client, obtain outstanding color about stock movement, the size and tone of institutional trading, and more. The best analysts then synthesized that immediate ?look? at trading with the most recent settlement data and feedback from institutions to provide a continuous narrative to his or her client, tying trading and settlement together to speed identification and size of institutional positions.
As regulatory change and technology combined to reduce the share of volume traded on a company?s listed exchange to some 20% or so of total traded volume, that single source of color on the majority of trading activity went away. Sadly, most stock surveillance efforts deemphasized the analysis of trading as an important component of their mandate from clients. Instead, too much surveillance now comprises the aggregation of news, analyst comments, and broad-brush market or industry commentary, backed by monthly review of settlement data and subsequent reporting. Many public company clients therefore settle for using large surveillance firms as information aggregators, instead of being able to rely on original research and analysis that the best surveillance traditionally provided.
While market structure has changed, the critical nature of reliable, timely information about trading and institutional activity has not ? particularly as activist investors modify their tactics to rely more and more frequently on building positions in target companies that include common stock ownership augmented by sizable positions in options. Jana Partners, Icahn, and Pershing Square have all employed options ownership along with purchases of common stock to build stakes that allow them to file a 13d announcing their activist intentions. Between February and June Jana Partners alone did just that with their stakes in ConAgra Foods and Computer Sciences.
In the current environment, stock surveillance, like any service that aims to help clients perform their jobs more effectively, has to evolve. It can no longer rely on hard working analysts working with spreadsheets and twenty-year old internal workflow platforms and a telephone. No, today effective stock surveillance has to incorporate big data analytics, experience from non-traditional backgrounds, like options trading, in its analyst and technology team makeup, and produce analysis that monitors the entire ecosystem for a company?s equity trading, including options.
Adapting, evolving, improving ? providing intelligence rather than aggregating information ? is the critical need for stock surveillance providers.
These efforts lead to important breakthroughs, including sophisticated analysis of order flow to measure and report the contributions to stock trading and performance daily. Forward looking indicators for sentiment and price movement that arm the analyst and client alike with what the market is anticipating short term ? and providing early alerts when trading deviates from the expected range. And, importantly, monitoring equity and option flow for intelligence about conditions when activists are likely on the move.
All of these efforts are designed to support the investor relations professional in that common denominator that defines the IR community: to help the profession, and its practitioners, continually adapt and move forward.