Victoria Geddes, Executive Director
Post results reporting season is a time when investment banks start engaging their clients, in advance of the year’s end, to get mergers, spin-offs and takeovers off and running. Witness the recent TPG and Vodafone merger as well as the Coles spin-off from Wesfarmers.
The merits of engaging in Proxy Solicitation around M&A and demergers is well understood, as it is that last hurdle that needs to be overcome for the deal that has been diligently worked on for months, and sometimes years, to succeed. If the register is retail heavy a favourable outcome cannot be taken for granted and yet it is this shareholder group that companies and their advisers know least about. The accepted wisdom is that retail shareholders will support the board and its recommendation and, as a rule of thumb, this generally works. But we have worked on takeovers and activist campaigns where that assumption cannot be relied upon and boards take retail shareholder loyalty for granted at their peril.
And why should this come as a surprise? In 2009 in the depths of the GFC, companies spent the year disenfranchising retail shareholders by placing large lines of stock at significant discounts with institutional investors in order to shore up their balance sheets. The dilution effect for retail shareholders was material and institutions were amply rewarded over the following year as the share market rallied by 50%.
Most companies are now much more cognizant of the principles of equity and fairness when it comes to providing shareholders with first right of refusal when they are raising capital. We have seen a return to the old fashioned rights or entitlement issue, accessing the more timely accelerated non renounceable entitlement offers with a follow up retail component or utilizing the popular institutional placement plus SPP (Share Purchase Plan) for retail shareholders. Regardless of how capital is raised, contacting retail shareholders to alert them to the fact they are not forgotten and their participation is valued, is central to good IR.
But consider this, as companies save costs by requiring shareholders to opt in to receive annual reports and other communications by mail, the connection with retail shareholders becomes increasingly tenuous. Many listed companies are starting to realise that while they know a lot about their institutional owners, regularly meet with them and occasionally survey them for their opinions, they have very little information about their retail shareholder base, apart from where they live. And for companies, whose register is dominated by retail shareholders, what matters to them can be critical in terms of understanding the impact of changes to dividend policy and other capital management initiatives.
So what is there to know and how do you find out?
As an extension of our IR advisory practice, we have spent nearly 20 years supporting companies communications during transactions and a lot of time talking to retail shareholders. We realized fairly early that the process of engaging with shareholders is much more than simply running a call centre for a specific transaction with a particular outcome in mind. It is a key part of the IR function and offers the opportunity for two way engagement with shareholders. So when we ‘do’ proxy solicitation or undertake assignments to engage directly with retail shareholders we ask questions, seek their opinion and have a conversation. The responses we get are often thoughtful, insightful and definitely worth listening to.
Here are a couple of typical examples of feedback from retail shareholders:
In response to a call informing him about a capital raising – “The only time I ever hear from companies that I’m invested in these days is when they want some money”
During an activists’ ultimately successful campaign to wind up a fund – “I really liked the concept of the fund and its investment strategy but I never heard from them. Even during the GFC there was just no communication to let us know what they were doing. They started to communicate recently but it was just too late”.
Effective communication with shareholders, retail as well as institutional, is not hard but does definitely require more effort. However we know, because we asked them, that they are happy to receive communication by email and they will answer questions or provide feedback if asked. With the takeover season about to kick off, building goodwill through some targeted engagement and effective communication could be an investment with a rapid payback.