Analyse this: it's an unwise plc that fails to engage with the investment community, but many companies still communicate poorly and then wonder why they're given unfavourable valuations. Scott Payton explains what the analysts really want from you--and how best to give it to them.
| Author | Payton, Scott |
| Position | Alliance UniChem PLC acquires Boots Group PLC |
No one could ever accuse Alliance Boots' outgoing chairman, Sir Nigel Rudd, of mincing his words. In April he declared that many of the analysts who'd covered the 2006 merger of Boots and Alliance UniChem were "stupid". Why? Because he thought they had completely failed to grasp the true value of his company.
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Rudd seemed to have a strong case. After all, he'd just sold Alliance Boots in a private equity deal for 40 per cent more than the price recommendation of about half of those analysts. But were they really to blame for undervaluing the company?
Michael Berkeley is head of investor relations (IR) at Citigate Dewe Rogerson. which advises a number of big European companies on their financial communications. He believes that Rudd was wrong to accuse analysts of stupidity, because the way they assess a company's value is very different from how a private equity house does it.
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"An analyst is there to take a view on a company as it stands, with its current management, strategy and capital structure," Berkeley says. "It's not an analyst's job to say: 'If private equity came along, or if the company were to change its capital structure dramatically, its value would increase to this much.'"
Peregrine Riviere was an equity analyst himself before he jumped the fence to become group director of corporate affairs at Carphone Warehouse and chairman of the UK investor Relations Society. He also has some sympathy for the analysts covering the Alliance Boots deal, but admits that they do tend to focus on companies' immediate prospects, albeit through no fault of their own. Their clients--hedge funds, for example--often set them short-term performance targets, creating a demand for analysis to support short-term trading decisions.
Whether this approach is healthy or not, how should FDs and other senior executives ensure that the investment community has an accurate view of their businesses? Scott Fulton was a sell-side analyst for many years before joining Citigate Dewe Rogerson to advise firms on IR. He believes that the secret to forming successful relationships with analysts is to have a deep understanding of their valuation methods.
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"Finance directors need to understand the mechanics of the sell side much more than they currently do," he says. "And they should treat analysts almost as partners when it comes to determining the most appropriate value for their companies."
According to Fulton, the need to work closely with analysts has become particularly important since the introduction of international financial reporting standards. "Company presentations and analyst...
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