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Mckinsey on Finance McKinsey on Finance Perspectives on Communicating with the right investors 1 Corporate Finance Executives spend too much time talking with investors who don’t matter. and Strategy Here’s how to identify those who do. Running a winning M&A shop 6 Number 27, Picking up the pace of M&A requires big changes in a company’s Spring 2008 processes and organization—even if the deals are smaller. Starting up as CFO 12 There are a few critical tasks that all finance chiefs must tackle in their first hundred days. Preparing for a slump in earnings 18 Historic trends suggest earnings may fall more than most executives expect. Companies should prepare for steeper declines and take steps to strengthen their positions when times improve. McKinsey on Finance is a quarterly publication written by experts and practitioners in McKinsey & Company’s Corporate Finance practice. This publication offers readers insights into value-creating strategies and the translation of those strategies into company performance. This and archived issues of McKinsey on Finance are available online at corporatefinance.mckinsey.com, where selected articles are also available in audio format. A McKinsey on Finance podcast is also available on iTunes. Editorial Contact: [email protected] To request permission to republish an article, send an e-mail to [email protected]. Editorial Board: James Ahn, David Cogman, Richard Dobbs, Massimo Giordano, Marc Goedhart, Bill Javetski, Timothy Koller, Robert McNish, Dennis Swinford, Anders Rasmussen, Werner Rehm Editor: Dennis Swinford External Relations: Joanne Mason Design Director: Donald Bergh Design and Layout: Veronica Belsuzarri Managing Editor: Sue Catapano Editorial Production: Roger Draper, Drew Holzfeind, Mary Reddy Circulation: Susan Cocker Cover illustration by Brad Yeo Copyright © 2008 McKinsey & Company. All rights reserved. This publication is not intended to be used as the basis for trading in the shares of any company or for undertaking any other complex or significant financial transaction without consulting appropriate professional advisers. No part of this publication may be copied or redistributed in any form without the prior written consent of McKinsey & Company. 1 Communicating with the right investors Executives spend too much time talking with investors who don’t matter. Here’s how to identify those who do. Robert N. Palter, Many executives spend too much time communicating with investors they would be Werner Rehm, and better off ignoring. CEOs and CFOs, in particular, devote an inordinate amount of time Jonathan Shih to one-on-one meetings with investors, investment conferences, and other shareholder communications,1 often without having a clear picture of which investors really count. The reason, in part, is that too many and operational data are most helpful for companies segment investors using traditional the investor? We believe that the answers to methods that yield only a shallow under- these and similar questions provide standing of their motives and behavior; for better insights for classifying investors. example, we repeatedly run across investor relations groups that try to position Once a company segments investors along investors as growth or value investors— the right lines, it can quickly identify mirroring the classic approach that investors those who matter most. These important use to segment companies. The expectation investors, whom we call “intrinsic” is that growth investors will pay more, investors, base their decisions on a deep so if a company can persuade them to buy understanding of a company’s strategy, its stock, its share price will rise. That its current performance, and its potential expectation is false: many growth investors to create long-term value. They are also buy after an increase in share prices. more likely than other investors to support 1 Including a wide range of communications More important, traditional segmentation management through short-term volatility. activities, such as annual shareholder meetings, conferences with sell-side analysts, quarterly approaches reveal little about the way Executives who reach out to intrinsic earnings calls, and market updates. investors decide to buy and sell shares. How investors, leaving others to the investor 2 This article deals only with institutional 2 investors, since management usually spends the long does an investor typically hold onto relations department, will devote less time most time with them. We also exclude activist a position, for example? How concentrated to investor relations and communicate investors, as they represent a different investor relations issue for management. is the investor’s portfolio? Which financial a clearer, more focused message. The result MoF 27 2008 Investor Communications Exhibit 1 of 2 2 McKinsey on Finance Spring 2008 Glance: Intrinsic investors make a significant effort to understand the companies they invest in. Exhibit title: Thorough due diligence Exhibit 1 Activities of long-term intrinsic investors1 Thorough due diligence Uncover investment idea Conduct initial review Due diligence Monitor company Intrinsic investors make a significant effort to Time Ongoing 2 weeks 4–8 weeks 3–5 years understand the companies they invest in. t Investment analyst t Analyst develops t Analyst conducts t Analyst monitors identifies opportunity preliminary view based in-depth due diligence with operating per- (through electronic scans, on public information focus on developing formance, share price networking, conferences) t Analyst reviews with proprietary knowledge, t Portfolio manager portfolio manager; information (review tweaks exposure, portfolio manager makes models, consultant work) depending on go/no go decision t Completes investment changes in outlook thesis with focus on and price long-term position of company, associated value Relevant t Past financials, consensus t Web site, press t Past operations and t Quarterly updates on information estimates, trading releases, management unit-level information, performance, on company information, implied press, sell-side management’s future significant changes valuation analyst calls and strategy and forecasts, in outlook reports, industry industry outlook, reports management’s background t Detailed follow-up information from company Interaction t Limited; if any, probably t Limited, usually through t Multiple in-depth meetings t Occasional meetings, with through investment telephone discussions with executives at all calls with investor company conferences with investor relations senior leadership levels relations unit unit t Follow-up conversations, if t Semiannual or annual necessary, with investor senior-management relations unit meetings For short-term intrinsic investors, review and due diligence could be a matter of days, and their hold period can be as short as to months. should be a better alignment between Intrinsic investors a company’s intrinsic value and its market Intrinsic investors take a position in a value, one of the core goals of investor company only after rigorous due diligence relations.3 of its intrinsic ability to create long-term value (Exhibit 1). This scrutiny typically A better segmentation takes more than a month. We estimate No executive would talk to important that these investors hold 20 percent of US customers without understanding how they assets and contribute 10 percent of make purchase decisions, yet many the trading volume in the US market. routinely talk to investors without under- standing their investment criteria. Our In interviews with more than 20 intrinsic analysis of typical holding periods, invest- investors, we found that they have ment portfolio concentrations, the number concentrated portfolios—each position, of professionals involved in decisions, on average, makes up 2 to 3 percent 3 If this goal sounds counterintuitive, consider and average trading volumes—as well of their portfolios and perhaps as much as the alternatives. Clearly, undervaluation as the level of detail investors require when 10 percent; the average position of other isn’t desirable. An overvaluation is going to be corrected sooner or later, and the correction they undertake research on a company— investors is less than 1 percent. Intrinsic will, among other things, distress board members suggests that investors can be distributed investors also hold few positions per analyst and employees with worthless stock options issued when the shares were overvalued. among three broad categories. (from four to ten companies) and hold MoF 27 2008 MoF 27 2008 Investor Communications Investor Communications Exhibit 1 of 2 CommunicatingExhibit 2 of 2 with the right investors 3 Glance: Intrinsic investors make a significant effort to understand the companies they invest in. Glance: When intrinsic investors trade, they trade more per day than other investors do. Exhibit title: Thorough due diligence Exhibit title: Concentrated impact 1 Activities of long-term intrinsic investors Exhibit 2 Annual trading Trading activity per Concentrated impact Investor Annual trading Annual trading activity per investor investor in segment per Uncover investment idea Conduct initial review Due diligence Monitor company segment activity per activity per investor in segment per investment per day,1 segment, $ trillion in segment, $ billion investment, $ million $ million Time Ongoing 2 weeks 4–8 weeks 3–5 years When intrinsic investors trade, they trade t Investment analyst t Analyst develops t Analyst conducts t Analyst
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