Initial Public Offering Investor Relations
IR and the IPO
Whether the slick investment bankers of Wall Street will admit it or not, the game of making an initial public offering is played with public relations techniques. The business of public relations applied to the securities industry is called investor relations or
IR for short.
The demand for any initial public offering is in large part determined by the attitude of the public in general and the investing public in particular.
If gasoline and crude oil prices are out the roof, alternative energy is favored. If global warming is in the news constantly, green technology deals see increased demand. If we are all using social media websites like addicts, social media deals will flood the market to meet the enthusiasm. The same phenomenon has over the years blessed Internet deals, oil deals, uranium deals, biotech deals, interferon deals (interferon was once described as a substance that caused stock brokers to go into a buying frenzy), and many more.
The smart investor relations professional will start early, long before any approach to an underwriter is made. He will start with the scientists in the technical field of his company, or in the literature that is read by only the most technical of those interested.
From there, in every increasing circles of readers, he will keep planting stories about the virtues and accomplishments of his company in media that are less and less esoteric and technical and more and more public.
When there is sufficient interest, the company can approach the underwriter and be assured of a good appetite on his part. The campaign will continue nonetheless.
However, none of this communication will in the slightest refer to any chance that the company might seek financing, as it is forbidden by the securities laws to “jump the gun” and announce an offering before it is filed with the SEC.
As soon as the offering is filed with the SEC, the IR professional must see to it that the company is only doing product public relations and no investor relations. Be that as it may, many companies are aggressively buying product advertising and doing other public relations during this time.
The word on the street in the investment community must somehow be that this is a “hot issue” and an offering that it is very difficult to buy stock in, and that the offering is likely to sell at a large premium in the aftermarket. How this is accomplished is an art beyond my understanding. In my opinion, it depends in large part on the approach taken by the media in general and the financial media in particular. That will depend on the public relations success before the offering is filed.
Consider, for example, all of the interest and hype surrounding a Facebook IPO. The company has not yet filed, may not file, but the financial media is still saying that the company will raise obscene amounts of money and that the demand for it will be so hot that the stock could be sold even in a bad market. This is the kind of propaganda that IR people dream of.
The nightmare of the IR professional is to be connected to a weak company that is going public only because there has been a mania for that industry, but because of the slowness of the company and its attorneys, the company is hitting the market when all of these issues are soggy in the aftermarket, there is a slew of companies in that industry in registration. In short there is a glut and the media is running articles announcing this fast. The shorts are blasting the bids of all of the IPOs with great enthusiasm and success. That is a difficult situation to save.
Once the issue is trading, during the quiet period, the IR will quietly line up his troops and resources and be ready when the quiet period ends. He is likely to be tested here as the market makers and thew shorts will be waiting for the insiders to be selling their restricted stock. Thanks to full disclosure they will know the exact day when the restricted stock may be sold.
When I was a market maker, I did not short IPO stocks in their early trading as I was also responsible for supporting the aftermarket for my company's IPOs and did not want other market makers to come after me out of revenge for such rudeness.
However, I delighted in shorting IPO stocks on the day before the insiders could sell. It was like shooting ducks in a barrel.
Inevitably, the investor relations professional will find himself explaining why an issue is down. Stocks have been known to go down as well as up, and in fact the more violently up they go, the more likely they are to come down in the same fashion. We call this pendulum theory. The smart IR firm will be prepared for this as well.