news and Insights
- Client Update: Lessons Learned From the DuPont-Trian Proxy Fight
- Perry Street — Recent Developments
- Investor Relations Planning Amid an Active IPO Market
- Facebook Avoids Early IPO Filing Pitfalls
- Client Alert: Hedge Funds Tackle New Communication Challenges
DuPont-Trian Proxy Fight: Communications Lessons LearnedThe high-profile, prolonged and contentious proxy fight between DuPont and Trian Partners recently concluded in victory for DuPont as shareholders elected all 12 members of DuPont’s director nominees. This outcome – which The Wall Street Journal deemed a “landmark” setback for Trian – represented the culmination of an epic battle spanning two years and included a pitched debate concerning the increasingly outsized role of shareholder activism. After all, even before Trian began publicly agitating, DuPont had taken significant steps to improve productivity, return capital to shareholders, and position the company for the future through divestitures and related strategic efforts. The results seemed to speak for themselves as DuPont’s stock outperformed the broader market. Nonetheless, Trian campaigned aggressively on the notion that DuPont suffered from bloated corporate overhead, misguided acquisitions, and general underperformance relative to peers. As with many proxy and activist situations, DuPont’s communications strategy played a vital role in the outcome. At the risk of over-simplifying an immensely complicated situation, we believe there are nonetheless key communications lessons that apply to public companies contemplating how to: (1) prepare for and preempt an activist shareholder; and (2) decisively manage such a situation once it has developed. Key considerations in this regard include the following:
- The Best Defense is a Great Offense: After the final votes had been tallied, DuPont CEO Ellen Kullman observed that, “I think we as a company don't tell our story well enough … we've undergone a lot of change, and as we've engaged with shareholders, even retail, it was clear that they remembered a company of maybe 20 years ago, not the company that we're creating going forward.” This underscores the fundamental value of developing and executing a thoughtful, proactive investor relations strategy with consistent and frequent communication with shareholders. Doing so will help ensure buy-in and build support from retail and institutional investors alike before an activist situation takes hold. Companies that undertake such efforts only after an activist shareholder situation arises will, by definition, be playing defense. And, what’s worse, they may not have all of their plays ready in the first place.It also is worth noting Kullman’s related observation that, as an engineering and science-based company, DuPont had perhaps under-invested in telling shareholders about the “power of DuPont.” This brings to mind the profoundly elegant saying that, “The single biggest problem in communication is the illusion that it has taken place.” Shareholders can’t read the corporate-institutional mind.
- The Power of Compelling and Consistent Messaging: Retail investors and the three largest shareholders in DuPont, all of which manage index funds, overwhelmingly sided with the company. In appealing to these shareholders, DuPont maintained basic and consistent messaging predicated on the theme of higher growth and higher value by, among other things:
- Spinning off the performance chemicals unit;
- Repurchasing additional shares;
- Leveraging the company’s innovation platform; and,
- Cutting costs.
- Importance of Campaign-Style Tactics: Activist campaigns and proxy fights serve as the corporate equivalents of political-style campaigns. While tactics in this regard must be tailored to the situation at-hand, there is value in considering the following:
- Press releases
- ‘Fight letters’ can be disseminated broadly as press releases.
- Stand-alone press releases also can be used responsively.
- Personal visits
- Executive roadshow, including investor presentation and detailed questions and answers.
- White papers/editorials
- As the contest progresses, parties should evaluate the need to develop or maintain momentum through a variety of additional communications activities, including the submission of editorials or other commentary to leading publications.
- Throughout the campaign, documents and additional information can be posted to a dedicated website.
- Press releases
- Response Team: It is a good idea to create a team to prepare for and respond to shareholder activism. Ideally, this team would consist of key members of senior management, internal and outside legal counsel, proxy solicitor and public relations experts.
Perry Street — Recent DevelopmentsWith the New Year upon us, Perry Street Communications is pleased to report several key developments that underscore our growing prominence counseling clients through complex and demanding communications challenges. Notably, Perry Street continues to work with clients across diverse industries to offer candid and sound advice — as well as effective tactical execution — in sensitive corporate transactional work. These are the “bet the company” moments, during which communications often play a critical role. Our success in this regard is highlighted by the following:
- Perry Street ranked #7 in The Deal’s Q3 bankruptcy league tables, with active engagements totaling more than $50B in total liabilities. The Deal ranks the top investment banks, law firms, crisis management firms and non-investment banks, as well as the respective professionals, by the volume of liabilities of bankruptcy deals advised for that quarter. Perry Street is proud of this achievement, which we believe highlights our ability to “punch above our weight” when it comes to corporate transactional work.
- In addition, the firm is advising clients concerning significant corporate transactional / M&A-related engagements. This includes client representation on deals worth an aggregate of well over $1B during the 2014 fourth quarter alone.
- Finally, as in the prior two years, Absolute Return recently (October 27, 2014) identified Perry Street as one of the nation’s top 20 public relations firms advising hedge funds and other alternative investment managers. Perry Street brings a distinctive geographic twist to this recognition, as we were the top-ranked firm in this category outside of the Northeast corridor.
PERRY STREET COMMUNICATIONS, LLC INVESTOR RELATIONS PLANNING AMID AN ACTIVE IPO MARKETIn recent months, the pace of initial public offerings (“IPOs”) has accelerated appreciably. Analysts attribute the increase to myriad factors, including generally favorable capital markets, private equity firms seeking exits, and relatively strong fundamentals in key industries (retail, restaurant and energy, most notably). But whatever the catalyst, the trend is undeniable: there were a total of 62 IPOs in the second quarter of 2013, an increase of 82% compared to 34 listings in the first quarter, and an increase of 88% compared to 33 listings in the second quarter of 2012. In launching an IPO effectively, companies should be deeply cognizant of both the challenges and the opportunities. The opportunities – increased liquidity for general corporate purposes; greater access to capital in the future; more flexible compensation structures; and enhanced visibility in the marketplace – are well-known. The challenges – establishing public credibility; identifying what shareholder value means for the company and building strategies to improve it; preparing for the increased oversight and scrutiny of both the press and regulatory agencies; and compliance with still-evolving disclosure policies – require ongoing and vigilant consideration. Given the active IPO market, this memorandum is intended to provide a high-level review of the ways in which companies planning for an IPO – or those that are newly public – can mitigate these challenges (and maximize the opportunities) through structured and comprehensive communications programs. More specifically, we believe that adherence to the broad concepts below will go a long way toward “bridging the gap” between a public company’s stock market value and its actual intrinsic value. The attendant benefits are clear: lowered cost of capital (if stock is used in an acquisition, etc.), wider and more committed interest from institutional investors, deterred activist and takeover efforts, and higher compensation for employees. For purposes of this discussion, Perry Street has identified three phases in the IPO communications process in which a company can successfully advance these objectives:
- The Quiet Period
- Listing Day
- Life as a Public Company
THE QUIET PERIODThe Quiet Period extends from the time a company files a registration statement with the Securities and Exchange Commission (“SEC”) until SEC staff declare the registration statement “effective.” Although federal securities laws limit what information a company and related parties can release to the public during the Quiet Period,1 a company should not confuse this time with a period of communications and investor relations (“IR”) inactivity. Indeed, behind the scenes, a company and its advisors should be developing the protocols and infrastructure necessary for success. Representative steps in this process include:
- Build the Team: Life as a public company will entail significantly-enhanced scrutiny from virtually all stakeholders, as well as the potential for damaging marketplace rumors and attendant disclosure challenges. A team built around legal and compliance counsel, finance, and investor relations/communications will help ensure appropriate and duly-considered responses.
- Refine Messaging: Companies in a Quiet Period should be using the time to clearly define and differentiate the company through its communications. New shareholders should understand the company and its goals, and how the company believes its success should be measured.
- Develop Key Collateral: On "Day One" of a public listing, companies should have prepared some key investment-community materials, including:
- Company fact sheet,
- Press release announcing commencement of trading,
- Management bios, and
- Standard IR presentation for ongoing use, post-IPO.
- Establish Strong IR Presence: At a minimum, a designated investor relations web page will include placeholders for SEC filings (including the S-1), 10-Qs, annual reports, etc. The
1 We would add here that investor relations and communications professionals should play an integral role in drafting the S-1 itself. Although primarily a legal and regulatory document, the investment thesis and narrative must be drafted with an eye toward the public market and prospective investors.
- company should also establish a relationship with a service provider to ensure that as material news is disclosed it automatically posts to the investor relations section of the web page, as required. In this phase, companies might also consider building a database of prospective investors.
- Refine Disclosure Policies: Companies should create written disclosure and/or communications policies that clearly delineate roles and guidelines for the IR process, including social media, and disseminate the policies internally to ensure that it is clear who is permitted to speak on behalf of the company and what they can communicate externally. A clear earnings guidance policy should also be part of the process.
LISTING DAYThe second important communications phase is Listing Day, the first day the stock is traded on the relevant Exchange. This commences the battle for investors’ attention and – most importantly – their capital. The Listing Day offers a signature moment for a company to distinguish itself within its industry and earn a market value that accurately reflects its intrinsic value. The Listing Day program might include several components that will work to establish presence as a publicly-traded company. Listing Day activities typically include:
- Press release announcing the company’s pricing,
- Breakfast ceremony with Exchange officials before the market opens,
- Bell ringing ceremony at the Exchange,
- Press release announcing commencement of trading,
- Communication to all employees (including, as appropriate, a Town Hall meeting or related event for employees) and,
- Media interviews with senior executives.
LIFE AS A PUBLIC COMPANYAfter the IPO process, the company should turn to building and maintaining the new relationships it has established, which will require a continued effort to establish credibility; define the company; and provide information that meets the needs of investors and analysts. At this stage, the investor relations function must be in place and fully operational. The IR function has numerous responsibilities, including (but certainly not limited to):
- Educating and Informing Stakeholders: In addition to regular-course filings with the SEC, a company can leverage significant filings (e.g., quarterly reports and select material events) as opportunities to speak to and engage with stakeholders, particularly investors, clients and analysts. The company should communicate these corporate developments via press release in a timely manner and should consider media strategies to support the effort. Ensuring timely and transparent responses to analysts and large investor inquiries should also be paramount.
- Developing Message Discipline: It is integral that the company reiterate its vision for the future in every shareholder communication, at conferences, in one-on-ones, and as part of every significant milestone in between.
- Securing and Expanding Shareholder Base: A company should aim to secure its shareholder base and widen the number of institutions that follow it, perhaps with the intention of investing later. Equally important is the need for a company to establish solid relationships with independent governance arbiters such as Institutional Shareholder Services (ISS) or Glass Lewis, who are particularly vital in an age of greatly increased investor activism.
- Communicating Credible, Consistent Earnings Milestones: Quarterly analyst conference calls and annual analyst meetings should be scripted, and Q&As should be developed and updated on an ongoing basis. A company should monitor feedback from both buy- and sell- side analysts to gauge their concerns/interests in the company, especially following quarterly earnings or other material announcements.
GOING FORWARDWhile each of these concepts is integral to the successful launch of an IPO, it is also important that a company maintain a robust and proactive IR strategy, especially in an environment of continued market volatility and increased activist efforts. Consistent, transparent, and frequent communication concerning the levers of success can help ensure healthy shareholder relationships through good times and bad.
Facebook avoids early IPO-filing pitfalls
Danielle DroletMENLO PARK, CA: Facebook's initial public offering filing brought the company a slew of media attention, but it also gave the public a closer look at the social media heavyweight. The Securities and Exchange Commission filing, which could boost the value of the company to between $75 billion and $100 billion by this spring, included various insights, said Jonathan Morgan, owner of Perry Street Communications. He added that it also helped the company gain mostly positive media attention. "[Facebook CEO Mark] Zuckerberg's letter that accompanied the filing is one example, a 'human touch' to what can often be a highly technical undertaking," he said. "They also did a good job lining up third parties, such as Larry Summers, former Harvard president and treasury secretary, to vouch for [COO] Sheryl Sandberg and bolster external perception." The IPO process can be a grueling one, which has led other technology companies such as Groupon and Zynga to negative media attention, said Michael Fox, president of corporate communications at ICR. "Facebook has done a very good job of managing the extended and intense commentary around their potential IPO plans," he said. "Most importantly, they have avoided any noticeable missteps from a communications standpoint around the anticipated offering, and that has not been the case for some of their peers recently, including Groupon and Zynga. Both experienced operational or communication missteps that resulted in negative PR prior to the IPO." Morgan said he agrees that Facebook has been up to the IPO communications challenge so far, including giving investors access to financial data "without revealing the ‘secrets of the temple' that could alienate users.” Fox added that he's curious to see if Facebook will employ social media in its investor relations strategy. "The use of social media is still very limited and, frankly, not very relevant in the area of investor communication at this time, particularly as it relates to institutional investors," he commented. "With the IPO of the preeminent social media company, it will be interesting to see how they employ social media in their own investor communication and integrate it with more traditional channels that still dominate the communication process." Both Facebook and Brunswick Group declined to comment for this story. Brunswick is working with the social media company on communications for the IPO process. http://www.prweekus.com/facebook-avoids-early-ipo-filing-pitfalls/article/226032/
Client Alert: Hedge Funds Tackle New Communication Challenges
Key investor relations trends for alternative asset managers.We were honored to serve on a recent discussion panel for the Texas Hedge Fund Association concerning new challenges (and opportunities) for hedge funds seeking to define and differentiate their Funds in the marketplace. The topic is timely, to be sure: amid intense competition, skeptical investors and an underperforming equity market, the scramble for capital among alternative asset managers has never been more intense. This environment has served as a catalyst for a paradigm shift in how these managers think about investor relations and communication with key stakeholders. The black box era is over. Consider that eight years ago, KKR employed exactly two professionals in its investor relations department. That number today? 37. The same trend holds true for the hedge fund industry, where investors are demanding a relationship, not merely a transaction. These developments highlight a couple of key trends, which we believe are of interest for our clients and Friends of the Firm:
- It is well-known that the overall characteristics of the hedge fund investor base are changing. Whereas the industry’s roots lie in wealthy individuals and family offices, institutional investors now represent a growing percentage of the pie. According to The Boston Consulting Group, at the end of 2010 the institutional segment held 60% of global AUM. This trend should continue, as pension funds and (increasingly) sovereign governments seek potentially higher returns from hedge fund investments. Importantly, these institutional investors are beholden, in their own right, to stakeholders (retirees, public pensioners) that demand transparency and accountability. From an investor relations perspective, this mandates that hedge funds implement institutional-quality protocols designed to instill both confidence and a thorough understanding of risk and return strategies.
- A second trend of note is the growing concern that “key man” dilemma at hedge funds poses real risk. As Bloomberg recently characterized it, this means “….managing succession in a business where success is built on the founders’ trading skill and reputation.” Several of the star managers so closely affiliated with their funds have announced plans to step aside – and not always with success. When Chris Shumway of Shumway Capital announced he was retiring earlier this year, investors pulled $3B in assets despite the appointment of a successor. Shumway eventually closed the fund in its entirety. Legendary investor Stanley Druckenmiller also closed his Fund upon his announced retirement. This succession dilemma will no doubt become more prominent in the coming years as increasing numbers of key managers choose retirement over a future of enhanced regulation and a tougher return environment.
- The third development is more abstract, but no less relevant. The industry is transitioning (perhaps already has) from a purely transactional-based model to one grounded in relationships. So while performance was once the ONLY thing that mattered, it is now coupled with investor demands for information as to HOW returns were derived, what the investment process looks like, what the risk management systems are, who is performing valuation work, etc. This “returns +” model is predicated on thoughtful, diligent communication materials and open channels of communication that provide transparency into the Fund’s operations.
- Build / Nurture the Brand: We sympathize with the skepticism in the hedge fund community for “brand-building,” but we are in a new era. Recent surveys of U.S. and European institutional investors find reputation has become a primary consideration when choosing a hedge fund manager, and it follows that sophisticated investors want to know that their capital is being invested by an entity that: (1) knows its values and priorities; (2) has invested in building a culture to support those values; and (3) has internalized them from Founder all the way down the chain. A strong brand identity, which transmits a fund’s unique value proposition in a clear, concise, and compelling way, will help it capture and retain assets.
- Tell Them, Tell Them What You Told Them, And Then Tell Them Again: All materials that describe the Firm and investing strategies must – in a clear, concise, and compelling manner – reflect the brand and the Firm’s priorities. The same key message strategy deployed so effectively in the political (and, increasingly, corporate) realm are applicable to alternative asset investors.
- Media – Less is Often More: Importantly, the development and nurturing of a hedge fund brand should not be confused with media relations. The media can be a high-risk medium through which to communicate your message, and should be deployed judiciously and only in support of a specific business objective. There are myriad, “controlled” communication tactics that can be deployed to support a Fund without being subject to the often-unreliable filter of the media.
- Crisis / Contingency Planning: In today’s 24/7/365 media environment, hedge funds are highly vulnerable to the kind of rumor and innuendo that can destroy a hard-earned reputation. We believe this is particularly true as the Government plays a larger role in the economy: Phil Falcone, to cite one recent example, is under intense political heat for his investment in LightSquared and its relationship with regulators. Acute sensitivity to – and planning for – a range of external vulnerabilities should be hard-baked into a Fund’s communications planning.
Looking AheadThere is an old saying (to paraphrase) that “…no one ever got fired for hiring IBM.” Does it follow, ipso facto, that IBM always does a better job than its peers? Of course not (and it is certainly more expensive than most). What matters is that IBM stands for enduring values that resonate with corporate decision makers – values that have been refined, honed, and relentlessly invested in for decades. We believe the hedge fund industry is on the precipice of a similar dynamic: those funds that couple strong returns with a commitment to a strong brand and reputation will thrive.