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January 1, 1998

Investor-Relations Support

By Philip Scipio

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For some private companies, the lure of going public may be too much to resist. Practically instant growth, and the chance to put business on a faster track, are certainly tantalizing.

More than $180 billion in finance was raised by underwriters over the past ten years for thousands of companies.

Even so, why are many new companies left feeling like stock-market orphans after the hoopla and initial-public-offering process is completed? Why do the strongest only get the full support of their underwriters after the IPO tag falls from the stock?

Part of the reason is investor relations (IR), a strategy used by public companies to disseminate their business objectives to the financial community.

Of course, the underwriters' unwritten rule is that they provide coverage of the company after the IPO process, according to Sarah Mavrinac, research director on a recent IPO survey conducted by accounting giant Ernst & Young. About 30 percent of these companies, she noted, are "orphaned" immediately after the IPO is completed.

Indeed, most newly-public companies are satisfied with the IPO process overall, according to another IPO survey, released by Stapleton Communications, a Mountain View, Calif.-based investor relations firm.

Almost 90 percent of the 200 technology companies surveyed by Stapleton said they had chosen the right underwriter for them. The Ernst & Young survey found that nearly 72 percent of the 474 responding companies were satisfied with the process.

However, when it comes to aftermarket support, companies in both surveys were less than pleased. Mavrinac said that many of the companies without aftermarket support didn't invest in IR. These companies fall into two categories: those that don't properly value IR and those that do but don't know how to engage IR strategies.

"[IR] is key in developing relationships with the investment banker and analysts," Mavrinac said, adding that the companies that do, generally pick-up coverage quickly.

"Today, companies, rightly or wrongly, expect underwriters to hold their hands a little bit after the IPO," said Stapleton President Deborah Stapleton. The survey found that in many cases, respondents felt their first research report was not as timely, comprehensive or positive as they would have liked.

"The IPO process has become a commodity," Stapleton added. "Every firm conducts the IPO process in basically the same way. What sets banking firms apart is their ability to place the stock with the sought-after long-term investor, and to be there to support the companies long after the deal is done."

While 90 percent of the respondents in the Stapleton survey believe that they chose the right underwriter, 81 percent wished they had conducted more research before their selection.

On average, the companies looked at 8.13 underwriters before their selection. The vast majority, 93 percent, said they had absolute confidence in their underwriter and were well prepared for the roadshow.