A generation of IR professionals has known only a bull market. There have been ups and downs but, with inflation rising and the specter of a more sustained bear market looming, Garnet Roach looks at how communication evolves when the cycle shifts
‘It is still the largest cash transaction ever,’ says Karl Mahler, the multi-award-winning head of investor relations at Basel-headquartered pharma giant Roche, of the company’s acquisition of Genentech, which in 2009 was a part-owned subsidiary of Roche. ‘We had to get more than $40 bn out of the system and we had to do it in the middle of the Lehman crisis. Now that really was a bear market.’
Mahler describes the experience as ‘the most horrible time in finance [when] even the banks didn’t trust each other and wouldn’t lend to each other.’ So how did Roche pull it off?
‘In the end we went to the fixed income guys,’ Mahler explains. ‘There was still lots of money around, but nobody wanted to lend it to anyone – so you had to try to get the market to open up for you.’
Ultimately, he says Roche got the financing because ‘investors trusted in the financials’. And that’s his key lesson for anyone on the lookout for tips before the cycle turns: ‘The market is always going to look at the business fundamentals. That will always prevail.’
The event in question – the collapse of Lehman Brothers – is a key point in what many consider to be the most serious financial crisis since the Great Depression and the last real bear market. But there have been dips along the way, of course.
The Covid-19 pandemic triggered its own bear market in March 2020, for example, though stocks rallied back to historic highs, while there have often been sector-specific downturns, too.
A dip into oil Using the energy industry as a case study – ‘because the fossil fuel space has been in a recession for a few years’ – Nick Mazing, director of research at financial and corporate research platform Sentieo, examines how sentiment and communications have been impacted by that downturn.
The data shows a spike in immediately pressing issues being addressed on earnings calls, he explains. ‘For example, we can see that energy sector transcripts with mentions of ‘redetermination’ [a secured lending term related to the industry] spike during times of distress,’ he says. This increase is seen after the global financial crisis, again in the 2015-2016 energy turmoil and then again during Covid-19, when oil futures actually turned negative.
There are more permanent changes, too. ‘As the capital markets soured on the energy sector, we can see that ‘free cash flow’ and ‘break even’ are now frequent topics in energy sector transcripts,’ notes Mazing.
Sentieo can search transcripts for individual terms but it also tracks sentiment. ‘Changes in language around crises are observable at both the individual word level and at the broader sentiment level,’ explains Mazing. ‘We can see the oil industry turmoil in our transcript sentiment models.
'For example, looking at management sentiment for two oilfield services names, Schlumberger and Halliburton, we can clearly see the 2015-2016 crisis and then Covid-19. Revenues and sentiment declined during these two crisis periods but, more recently, we can see both revenue change inflecting and sentiment bouncing back.’
Taking a broader view of the sector, Mazing says things played out as you’d expect. ‘Investors spent more than 10 years financing the US shale boom but eventually wanted some money back,’ he says, pointing to other sectors today, such as software as a service, where investors are currently looking only for growth. ‘Eventually, this will change’.
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Uncomfortable conversations On a sector basis, pharmaceuticals, Mahler’s industry, is often seen as a safe, non-cyclical bet. But what about banking, for example? In a downturn, banks often become less profitable. Colleen Johnston, who served as CFO of TD Bank for 10 years, says good IR in a bear market is built on good IR during the good times.
‘TD issued an earnings warning in Q4 2008,’ she recalls, adding that even though ‘the whole world was in an all-out liquidity crisis’, that warning still surprised the market.
But TD – which has picked up 46 IR Magazine Awards since 2009 – already had strong relationships with analysts and investors. Johnston and former CEO Ed Clark decided it was time to ‘double down’ on IR.
‘In a world where everyone was a seller and no one was a buyer, it was really about valuation,’ Johnston says. ‘So we got out there and talked to people.’ That’s something she concedes can certainly be tough to do in a crisis situation, though: ‘You don’t have a crystal ball so it can be uncomfortable to get out there and talk about the future, when you’re not sure yourself where the world is going.’
What you have to do, she says, is put yourself in the shoes of your investors. ‘During the financial crisis, no one knew what was going on or where we would be six months – or two years – down the road,’ she recalls. ‘But just getting out and talking that through with investors was highly valued.’
You can offer investors a look at how your company views the world, Johnston explains: ‘You can show them the scenarios you’re planning for and let them see how you’re managing for best and worst-case scenarios.’
For Johnston and TD Bank, it also helped that the company was in ‘very good shape with a very strong balance sheet’, even closing a major acquisition in 2008. Johnston describes the buying of Commerce Bank as ‘a game changer for our US strategy.’
In good times and in bad What both Mahler and Johnston highlight – other than how strong fundamentals can support a company in hard times – is the need for strong relationships with the market. Essentially, IR in a bear market is simply the good IR you should have always had in place.
You should be transparent, responsive and available to investors and analysts. If you do that in the good times, both say, then you’ll have those relationships in place when you might need them in the bad times. It is also much harder to build such relationships once the chips are already down.
Johnston talks about the need to ‘press on and get out even more than you’ve done historically’, adding that companies should also think about enlisting more senior people to do that. ‘Investors want to hear from the IR team, but they really probably want to hear more from the C-suite,’ she points out. ‘How is the [senior team] looking at the world? How is that governing decision-making? What are its thoughts on M&A? The C-suite is in the best position to convey those messages.’
Johnston says much of the success of an IR program in a bear market comes down to how the company approaches IR in general. ‘It’s a long game,’ she stresses. ‘Things don’t always go to plan, but that’s not the time to start going out and trying to build relationships.’ But she also accepts that building those relationships requires a big time commitment, especially if IR is leaning heavily on C-suite time. ‘It is hard to prove return on investment on the time but – for me – it was invaluable,’ she says.
For those in IR, part of the challenge is going to the C-suite and carving out that time, she adds: ‘You need to put together the case for a robust program of activities.’ It's about more than that, however – it is also about having a strong team in place, perhaps one that is big enough and senior enough to not need to lean so heavily on top managers.
At the time of the financial crisis, Johnston (who chairs the board of Q4) says TD had a 12-strong IR team. She also advises leaning on service providers when and where they can provide assistance, noting how the coronavirus pandemic has resulted in a dramatic shift in the way we all use virtual meeting tools, for example.
Then there are differences in the way you communicate through different cycles. Mahler notes that the focus becomes simultaneously more short term and more long term, for example.
‘You have to reflect to the market what the potential impact [of any situation] might be, knowing that in a bear market, the level of flexibility decreases,’ he explains. ‘You have to make clear to your investors – and to your employees – that there is a certain level of insecurity. When things are changing so dramatically on the outside, you have to change your views, too, and become a bit more short term.’
On the other hand, Mahler stresses that you also have to talk long term ‘because you really want to focus on the fundamentals’. Using the Covid-19 pandemic as an example, he points out that ‘unfortunately, people are still going to develop cancer, they will still have multiple sclerosis, they will still have rheumatoid arthritis: these things will not change because of Covid-19.’
Like a marriage If you have the relationships Mahler and Johnston leaned on in times of crisis, then what you have is trust with the market. Mahler even describes the relationship with some of Roche’s big investors as being like a marriage.
The BlackRocks and Wellingtons of the world ‘go into a stock like ours with billions of dollars, making it too disruptive to move that money in a day,’ he explains. And the result is something like a marriage. ‘You know not all times will be perfect but somehow you need to manage your relationship,’ he says. ‘You need to have a trust base and that’s something that is not impacted by short-term moves like the financial crisis. Those things happen and everyone knows that. But investors don’t go in and out when they believe in the fundamentals of the system.’
For Johnston, the same is true of a company and its IR program – however tempting it might be to make cuts. ‘I’ve talked about running an all-weather IR program and I think the same is true in terms of investment in IR,’ she says. ‘Organizations should hold steady because it is just so important to maintain a robust IR program. You can always find ways to optimize and be more efficient. The IR team builds up a lot of knowledge of the organization and the investor base – and I don’t think you want to see that go.’
Don’t have a team of 12? Not a $300+ bn market cap? Matt Chesler, partner at FNK IR, which specializes in small-cap investor relations, says that while the idea that fundamentals always rule remains true even at the small-cap end of the market, smaller firms face different challenges from their larger peers. ‘Smaller companies tend to experience sell-offs related to economic downturns and external events more rapidly than larger companies, even if their businesses are insulated from macro events,’ he points out.
What doesn’t change, he says, is the crucial role that IR plays: ‘Even during bear markets, periods of uncertainty and heightened volatility, there are investors looking for opportunities. When there is extreme volatility and uncertainty, it is even more important to engage with existing shareholders to understand sentiment and stay aware of potential external changes that could put large holders at risk of exiting.
‘Understanding entry points and time horizons can help. Why are those investors in the stock? What is their thesis and does a bear market change that?’
Maintaining relationships and two-way communication is critical, Chesler notes, while also advising companies to consider rethinking their targeting strategy. ‘As valuations fall, companies may find more receptive audiences with growth-at-a-reasonable-price investors, or value or contrarian investors, depending on relative performance metrics,’ he says. ‘Similarly, companies may need to look a little lower down the investment value chain, reaching smaller funds to broaden the potential audience. Downturns increase the importance of tracking and understanding how smaller companies perform – and are valued – compared with peers.’
What Chesler stresses above all else, however, is the importance of more active and transparent communications strategies: ‘Simply put, you need to be willing to explain more.’
A longer version of this interview can be found at IRmagazine.com.
