The Scramble For Attention

Vernon Hill launched Commerce Bancorp in 1973, and took it public 12 years later as a small-cap stock. Today, it’s a New York Stock Exchange heavyweight and big-time investor darling. At a recent price of $64 per share, Cherry Hill, New Jersey-based Commerce boasted a market cap of $5 billion, and average daily trading volume of more than 500,000 shares. Hill hasn’t done too badly himself: The 534,000 shares he held in late February were valued at $33.6 million. “It’s been a great ride,” Hill says. “We’ve made lots of money. We’ve had lots of fun. And there’s still a long ways to go.”

There are many factors contributing to Hill’s success, among them a good strategy and powerful, consistent earnings growth. But arguably, what really makes Commerce’s stock sing is the presence of big institutional investors who have brought both liquidity and higher valuations to what, only 10 years ago, was a thinly traded issue with a meager market cap of just over $100 million. In total, 76% of Commerce’s shares lie in the hands of large money managers like Fidelity Investments, Putnam Investment Management, and Barclays Bank. But those investors didn’t come easy. For years, Hill personally lobbied the big institutions, usually to no avail. “It was very hard for us to get the story out that we had a different model,” he says. His early successes came closer to home, with local brokerage houses. Over time, the company’s float and valuations grew. The landmark moment: the day Commerce’s market cap broke the $1 billion barrier. At that point, he says, the liquidity-hungry money managers who once ignored him suddenly began to take interest. “From there, things took off,” he says.

It might be unrealistic to try to emulate Hill’s performance: His bank grew earnings 40% last year, it generates a consistent 18% return on equity, and operates right under the nose of Wall Street investors. But those eager to see their stock’s reception from investors soar could steal a page or two from his investor-recruitment playbook. In today’s world, attracting institutional money is the key for any banker seeking greater valuations or access to the capital markets. Pension funds, mutual funds, hedge funds, and the like now control some 70% of all investable assets. Get them on board, and you get more liquidity, which, in theory, should help drive share prices higher. In the best of cases, it can become somewhat of a “virtuous circle,” with an open door to expansion opportunities, greater earnings, and even higher valuations. “You need a good institutional component in the ownership of your shares to provide stability and the potential for substantial appreciation,” says Barry Alpert, managing director of investment banking for Raymond James & Co. in St. Petersburg, Florida.

The question is, how to get the ball rolling? There are no set rules or magic formulas. The most obvious way of getting onto big-investor radar screens may be with a merger. Bringing together two companies with market caps of, say, $250 million, can instantly create the size firm that can attract bigger investors. But even cutting that type of deal can be difficult without the currency of a liquid, well-valued stock. All that’s certain is that reaching a critical investor mass, with all the ostensible benefits that carries, can be a long, slow, chicken-and-egg process, where it’s seemingly impossible to land big investors without the valuations and liquidity only they can provide.

Stepping up to the plate

Of the roughly 1,000 publicly traded banks and thrifts in America today, only a relative handful of giants, such as Citigroup or Wells Fargo & Co., are lavished with an abundance of investor attention. Some smaller ones are listed only to give local shareholders some limited liquidity and appear to have no real interest in pursuing growth or higher valuations. The vast majority of the remainder sit in the murky middleu00e2u20ac”a place where the struggle for investor attention saps ever-greater amounts of time and energy from senior managements and can test the decision-making resolve of boards.

Make no mistake, experts say, selling the company to investors is a job for managementu00e2u20ac”preferably a strong CEO-CFO tag teamu00e2u20ac”not board members. “It’s inappropriate for directors to take a role,” says Anat Bird, a director at Sterling Bancshares in Houston, the former CEO of California Community Bancshares, and head of SCB Forums, a Sacramento-based firm that brings groups of bank executives together to hash out industry issues. “They don’t have sufficient information to credibly and accurately represent the bank to investors.” But it is the board’s responsibility to help weigh the relative value of an investor charm offensive and its potential for success, (including an honest assessment of the CEO’s ability to market the company) and decide how much time directors want their chief executive devoting to nonoperational matters.

There can be a downside to developing a broader investor base, including closer scrutiny and increased investor demands. At worst, pressure from big shareholders can force a company to sacrifice long-term strategies for short-term gains. “You’re only as good as your last quarter,” Hill explains. Experts also say it’s pretty much impossible to identify any solid return on investment figures from efforts aimed at getting more investors in the fold.

Ideally, then, the decision making on this front should be rooted in something strategicu00e2u20ac”be it expansion plans, or even a perceived need to provide some liquidity for local shareholders. “You need to ask yourself, ‘How critical is [gaining more investor attention] to the execution of our overall strategy?’” says Steve Nelson, a principal at Hovde Financial in Chicago. If more capital is neededu00e2u20ac”and other avenues, such as trust preferreds or private placements, aren’t practicalu00e2u20ac”then it’s reasonable for the board to encourage efforts to boost the stock’s visibility with institutional investors. This can be accomplished through simple pep talks, or, more directly, with incentives that reward a CEO for boosting total shareholder returns or the stock price.

Striking the right balance can be difficult, and there is no one “right” answer. Some CEOs report spending up to 30% of their time representing their organizations to investorsu00e2u20ac”time that could also be used for fine-tuning strategies or numerous other things. Tom Brown, director of Bankstocks.com, argued in the first-quarter issue of Bank Director that “the single most important driver of shareholder value is a company’s ability to grow its book value over time. And the best way a CEO can do that is to spend his time running the business for the long-term, rather than marketing his stock.”

Charles Elson, director of the University of Delaware’s corporate governance center, counters that it’s almost a fiduciary responsibility for a board to send its CEO out to sell the company to would-be shareholders, because doing so can serve existing shareholders. “Anytime you attempt to bring other investors to the show, it increases the value for those who are already there,” he says. While running the business is a CEO’s top duty, “getting out and discussing your goals and thoughts [with potential investors] is absolutely critical.”

A growing number of bank boards and CEOs seem to be taking such words to heart. In the quest for recognition, more top managers are doing stand-up routines at investor conferences, courting analysts, glad-handing investors in one-on-one meetings, using the Web to disseminate detailed information about their companies and stocks, and employing all manner of investor and public relations consultants to boost their profiles. They’re also employing other, more questionable techniques, such as paying small firms to put out research reports and ponying up for placement in investor magazines.

“We’re just throwing as much stuff at the wall as we can and seeing what sticks,” says Don Stricklin, CEO and a director at Texas United Bancshares in La Grange, Texas. Stricklin has done all of the above and more in the past year to promote his $637 million company’s stock, and estimates he spends about 25% of his time trying to woo investors. “There’s really no cohesive strategy,” he says. “I’m just trying to talk to as many different people as I can.”

Give ’em what they want

Experts say a successful investor-recruitment effort must be rooted in empathy for what money managers and other big investors need. The investment business is cutthroat, one where managers are judged largely on their ability to beat benchmarks, such as the S&P 500. “Part of the problem most banks have is they think more about their own needs than the needs of the end users,” Bird says. “What fund managers need is to be right, and to have the confidence that there’s no more risk investing in your company than investing in Wells Fargo.” In other words, courting deep-pocketed investors requires a good story with consistent earnings to match, candid and credible investor communications, and a willingness to spend time holding the handsu00e2u20ac”and answering the questionsu00e2u20ac”of would-be shareholders. “These guys write the big checks, and if you’re going to get their money, you have to give them attention,” Hovde’s Nelson says.

A story doesn’t have to be dramatic or flashy to be compelling. Nelson says some investors might be attracted to a big 4% dividend payout, an aggressive share buyback plan, or a bank that is a potential takeover target. Even a slow-growth bank whose earnings are rock solid can hold appeal to certain investors. The key for his company’s hedge fund managers, Nelson says, is “honesty and clarity in the vision and financial statements. When the [fund] manager needs to explain to his boss or investor base why he chose your stock, he needs to be able to cite a clear reason.”

The best stories, like Commerce’s, communicate in simple, understandable terms how the company’s strategy will differentiate it and produce solid, reliable earnings. Hill, a charismatic storyteller with a knack for the limelight, has successfully positioned Commerce as a retailer in bank’s clothing, with a “market-share grab” story that relies on prime branch locations, long hours, and good service to attract customers in big northeastern markets. Another differentiator: Hill views deposits, not assets, as the key to profitability and talks about it whenever, and to whomever, he can. “If you’re just another ‘me-too’ bank, nobody’s going to care,” says Hill. “There are thousands of places for investors to put their money. So you’ve got to have a really good story to tellu00e2u20ac”something like a growth record or a promising model that differentiates youu00e2u20ac”to even hope to get people to take notice.”

Crafting an effective story requires self-examination, and perhaps some help. “The first thing you have to do is figure out who you are. What’s your mission? What’s your market niche? What makes you different from the other guys?” says Jody Grant, chairman and CEO of Texas Capital Bancshares in Dallas. When his company was launched in 1998, Grant hired a public relations firm to help forge a message emphasizing that Texas Capital had the largest initial capitalization ($80 million) of any bank in history. During its IPO last August, that story, combined with strong growth as a local bank of choice for smaller and mid-sized businesses, helped sell 900,000 shares more than the original target. Pulling together a good story “is like any other part of the business,” Grant says. “You need to be focused, have a game plan, and execute on that plan.”

Bear this in mind, too: A story is only as good as its ending; it must be validated by performance. Texas Capital went public at $11 per share; by March, those shares were trading at $17u00e2u20ac”no doubt thanks in large part to an 80% jump in earnings during 2003. Commerce, meanwhile, has beaten analysts’ earnings estimates 18 quarters straight. “A good story is important, but only if it translates to the bottom line,” says Raymond James’ Alpert. “What captures the imagination of investors is consistent earnings.”

Even so, there are many bankers with solid stories and good earnings who don’t have much of an investor following. For them, the challenge is getting the word out. Where to start? Hill says analyst coverage is crucial. “It’s almost a first step,” he says. “Somebody has to be writing credible research on you, or nothing’s going to happen.” A recent study of IPO performance by University of Florida finance professor Jay Ritter and several colleagues seconds the notion. It concluded that analyst coverage fueled, on average, around a 4% short-term bump in the price of a stock. The more analysts who provided coverage, the more pronounced the effect. Other studies have shown similar advantages over the longer term, Ritter says: “Investors don’t buy stocks they aren’t familiar with, and one of the best ways to learn about a stock is to have an independent analyst recommend it.”

Sounds promising. But it takes patience and persistence to build an analyst following, and even then there are no guarantees. At Texas United, Stricklin has been working with several market makers, including Stephens Inc. and Hoefer & Arnett, (which also has advised the company on several M&A transactions), and “thought we’d have at least two or three people following us by now.” Instead, he’s got just one: Scott Analiz of Samco Capital Markets, a Dallas-based broker/dealer. And Stricklin’s far from alone. According to SNL Financial, of the 958 publicly traded banks and thrifts in the country, 552 have no analyst coverage at all. The drought, not surprisingly, is most acute at the smaller level: Just 30 of the 451 institutions on the list with assets of less than $500 million have coverage.

Breaking into the market

Landing analyst coverage only promises to get tougher. Tighter economic times have led many brokerage firms to trim their research budgets. According to one recent study, the number of companies followed by some big brokerages fell by as much as 30% between 2000 and 2003. Covering banks that lack enough float to generate decent trading revenues can be a money-losing proposition. Fallout from recent corporate scandals has only increased the woes. Where once it was common for investment banks to lure issuing companies to their services with the promise of favorable research, new rules drafted under The Sarbanes-Oxley Act and the 2002 “global settlement” with Wall Street have fortified the once-paper-thin “Chinese walls” between investment banking and research. “I cannot promise research” in exchange for underwriting or M&A advising business, Raymond James’s Alpert says.

Still, for those with capital-raising needs, anecdotal evidence suggests it remains possible to negotiate for coverage. Texas Capital went public using a syndicate of four investment banks, and today it has four analystsu00e2u20ac”from those firmsu00e2u20ac”following it. “The way you pick an investment banker is to look at the analysts. If they’re not going to cover you, there’s no reason to pick that firm,” Grant, Texas Capital’s chairman and CEO, says. It’s a fine line, but Ritter, the finance professor, says that while it’s illegal for an investment bank to offer coverage in exchange for business, “there’s nothing that prohibits an issuer from saying, ‘We’re not going to hire you unless your analyst covers our firm.’ ” And Alpert hints that such things can be worked out. “Obviously if we’re willing to underwrite an offering, it’s rare that we won’t [provide coverage].”

For those without a significant investment banking deal to leverage, the best advice for getting started may be to pound the pavement with local brokerage firms and those familiar with the industry. “You need to be assertive,” says Linda Margolin, head of Margolin & Associates, a Cleveland investment relations consulting firm with eight bank clients. “Determine who you’d like coverage from, and then start working with the firm to become more important to it as a client” by channeling more trading, market making, and other business their way.

There’s no shortage of boutique investment banking firms that specialize in serving the banking industry. Smaller in-market brokerage firms, whose clients are familiar with a local bank’s story, also may be helpful in garnering market attention. Commerce has more than a dozen analysts following it today, but it wasn’t always that way. In the late 1980s and early 1990s, Hill logged countless hours courting researchers from smaller local investment firms. “I asked. I begged. I threatened,” he recalls. “I did whatever I needed to do to get noticed.” Eventually, he got a crucial break, when an analyst with a small Philadelphia brokerage began covering the company.

And if you can’t get an analyst on board? Take heart: The institutional firms that control the lion’s share of today’s investment money value Wall Street research less than their own insights. Managers of Hovde’s $500 million hedge fund “don’t look at any of the buy, sell, or hold ratings” generated by those analysts, Nelson says. “We do all our own research.”

Building buzz

Along the road to greater attention lie other effective tools. Sterling Bancshares’ Bird argues that mediau00e2u20ac”local, business, and trade publications and the likeu00e2u20ac”provide the most valuable coverage, “because it’s allegedly objective and gives you more credibility.” Savvy CEOs implicitly understand this. Commerce’s Hill never misses an opportunity to talk with reporters about his bank. “We call it building the ‘buzz.’ You don’t always like what they print, but every little bit helps build visibility,” he says. Every time Texas Capital opens a new branch or launches a new product, it sends out press releases and makes a spokesman available to local newspapers. “Any way you can get your name out there, it helps,” Grant explains.

Landing a well-known investor can also give the a stock a boost. Texas Capital’s initial group included former business partners of President Bush, along with Lamar Hunt, owner of the Kansas City Chiefs. “People like that sprinkle holy water on the stock,” Grant says, thereby raising its profile. It seems to have worked. Today, 32% of Texas Capital’s outstanding shares are held by institutionsu00e2u20ac”including, importantly, a small stake by investment banking firm Keefe, Bruyette & Woods. Says Grant: “If you can get one of those boutiques on board, they’ll use their network to generate more investors.”

Another option: Get as far away from traditional bank investors as possible. Sherwood Wallace, author of two books on investor relations and chairman of the Investor Relations Co. in Chicago, notes a bank can easily be pigeonholed by industry-related fund managers as a mediocre investment. He says his firm recently helped place shares of a client bank with simple growth or value investors who “don’t care about industry ratios, [but] simply want a good company that meets their investment criteria.”

That requires time. The CEOs who participate in Bird’s forums say one-on-one meetings with investors have emerged as the most critical tool for attracting big investors. Early last year, Stricklin journeyed to Wall Street for several days of meetings in anticipation of an IPO that has yet to occur (Texas United is NASDAQ-listed, but hasn’t done a formal public offering). He found investors to be “quick studies” who quickly cut to the chase of asset quality, track record, and market demographics. “It took a lot of time, but it was interesting,” he says. Even more established companies must continually court investors. Hill recently met with eight institutional investors in one day. “They want to know the differentiating secret of the company, and whether we can keep the ball rolling,” he explains. “Even today, this is a semi-full-time job.”

Investor relations consultants can also help set up such meetings, though most banks are reticent to make the commitment. While larger companies regularly employ their own IR staffers, hiring an outside consultantu00e2u20ac”prices usually range from $50,000 to $150,000 a yearu00e2u20ac”can seem extravagant. “Comparatively few bankers want investor relations,” laments Wallace, whose firm has three bank clients and is aggressively marketing its services to more. He thinks banks are poised to win over more investors in a post-Sarbanes-Oxley world, because they’re highly regulated and look like safe, conservative investments. A good IR firm can play on those strengths, he says, by helping design marketing materials and conducting research on what shareholders want. “We know what works [in terms of getting investor attention], but a lot of bankers don’t seem to care about their shareholders,” he says.

For those who are still early in the journey, attitude and energy are among the most important attributes. In February, Stricklin traveled to Atlanta to share his story with about 20 other smaller banks at an investor conference. Stepping out from behind a podium, microphone in hand like a nightclub singer, he spent 15 minutes crooning to some 150 investment managers, analysts, and assorted middlemen about his earningsu00e2u20ac”in 2003, Texas United’s net income was $5.2 million, up about 20% from the previous yearu00e2u20ac”and his vision for building a growth company in rural Texas. “Our story is, we’re in great markets with good demographics. It’s fragmented and consolidating, and we’ve done a good job of acquiring without making any crazy deals,” he explains.

Afterward, Stricklin was approached by several fund managers, and by a representative from market maker Moors & Cabot, who volunteered to help with a potential share buyback. An investment banker also asked if he’d be willing to do a whirlwind road show with investors in New York and Boston later this spring. His response: “Why not? I’ll talk to as many people as I can about the company.”

Margolin, whose firm runs a series of conferences for supercommunity banks, says such forums are becoming more popular. Indeed, this year she’s adding San Francisco to a list of annual gatherings in Boston, Chicago, Atlanta, and Philadelphia. “There’s a real need for smaller, underfollowed banks to reach out directly,” she explains. Since the banks themselvesu00e2u20ac”and not an investment banku00e2u20ac”pay for the conferences, they are able to attract a much wider array of analysts and investors. “For bankers, this is a way to take matters into their own hands,” Margolin says.

Stricklin’s other attention-getting efforts have met with mixed reviews. Once, for instance, he paid $2,000 for a Q&A piece with an outfit called “The Wall Street Reporter.” The publication, which included interviews with other CEOs, was distributed to 5,000 brokers and placed in some United Airlines flights. Copies of the interview also went out with some investor and press kits. He’s also forked over $5,000 to Standard & Poor’s to list the company’s stock statistics and ratios in several investor databases. The results from those efforts were inconclusive. More concrete rewards came from paying $2,000 to a sister publication of Fortune magazine, which listed Texas United as a “shareholder-friendly company” that was turning a profit and paying dividends, and provided a toll-free number for more information. “We sent out 800 packets,” Stricklin says, though he doesn’t know if anyone actually bought shares as a result.

Like a growing number of other similar-size institutions, Texas United has also dabbled in the controversial area of paid research. Dozens of firms across the country produce quarterly reports on hundreds of small banks, charging their subjects between $5,000 and $40,000 for such services. Critics say there’s an inherent conflict of interest in a bank paying for such coverage. “Research is meant to be an independent evaluation,” says the University of Delaware’s Elson. “How independent can it be if the researcher will be fired for negative coverage?”

But John “Buddy” Howard, president of Equity Research Services, a Raleigh, North Carolina firm that produces paid research on more than 20 small banks, says he’s merely offering objective information. “My rules are, I get to call it like I see it, and if there’s bad news, I’m going to talk about it,” says Howard, who once was an analyst for a regional brokerage. While his reports tend toward the positive, he has recently issued critical opinions on several clients, including United Financial, a Graham, North Carolina bank that experienced asset-quality problems. Management’s response? “We can’t really argue with the assessment,” Howard recalls.

Increasingly, the Web is becoming more integral to investor relations efforts. Not only is it relatively cheapu00e2u20ac”Texas United pays about $1,000 per month to shareholder.com to manage its investor relations siteu00e2u20ac”it also can help confront new, tougher disclosure requirements. The SEC’s Regulation FD, for instance, requires that material insights provided to analysts or big investors be made available in a timely manner to the public at large. Webcasts of conference calls and investor presentations make it much easier than it would have been in the past to meet those standards. Meanwhile, online tools, including Internet chat rooms, and sites, such as Nasdaqtrader.com, which provides loads of information on specific stocks, can provide interested investors with more information than any IR contact ever could.

The payoff

Are all these endeavors worth it? Stricklin says yes. But he also knows that his efforts are a work in progress, and admits to sometimes being confused by the entire process. At least one institutional investor, Wellington Management Co., has bought into the company, though he’s only talked with its managers once. “They said, ‘We do all kinds of screening, and your company popped up as undervalued,’” he recalls. So, too, has at least one out-of-state bank with a history of acquiring other Texas institutions, Birmingham, Alabama-based Compass Bancshares.

While Texas United will probably never fetch the same attention and valuations of Hill’s Commerce, Stricklin’s efforts have had an impact on the community. The company’s share price has risen fourfold since his arrival in 1996, and liquidity has jumped to more than 8,000 shares a dayu00e2u20ac”admittedly not a huge volume, but enough to make some 1,200 local investors happy. “For the first time, folks can give the stock away to charitable organizations that can liquidate it, or simply sell it themselves,” he says. “That’s what the board wanted, and it wouldn’t be possible if we didn’t have these additional investors.”