Friday, August 6, 2010
Strategic Planning Analogy #344: Who to Court
The following are some quotes from billionaire entrepreneur Sam Wyly’s autobiography regarding the timing of his IPO of Sterling Software:
“Not only did we break new ground with our software company roll-up; we also broke new ground with the instant exchange listing. The market loved all this and, within one week, took our share price up from the initial $9 to $15. From there it headed to $30. Along the way, we raised more cash at $17 in what’s called a secondary offering. But in June, only thirty days after we’d gone public, the markets ran out of gas and lost their enthusiasm for technology. Prices dropped dramatically and the IPO market was as dry as a pumped-out oil field.”
“If we hadn’t hit the market when we did, we would have suffered during the following seven-year IPO equity drought along with a lot of other wanna-be technology start-ups that never got off the ground. Our timing was perfect.”
And this is what he said about the timing of when he sold the company:
“My initial investment was less than $2 million. We sold out in March 2000, at the peak of the tech and telecom market boom, for a price per share that was 30% over market. The total sale package was $8 Billion…Amazingly, we hit the very last month of the long bull market. The tech-heavy NASDAQ Index would drop 80% over the next two years.”
The stock market tends to act like the fashion industry. Sometimes a certain sector will be in fashion and have people clamoring to get in. Other times, a sector will fall out of fashion and have people clamoring to get out.
Sam Wyly made his billions in part because he understood the fashion cycles of the market. He quickly did his IPO of Sterling because he had a sense the tech stock IPOs would soon be going out of fashion. He was right and got the IPO done just in time. Later, he had put together an accelerated push to sell out quickly, because he sensed that the latest tech boom was about to end. He was right again.
In between the IPO and the sale, Wyly could see that anything remotely related to the internet was getting unrealistically high evaluations. Therefore, he split Sterling into two companies, with one piece positioned to be as much like those dotcom companies as he could. When he did a separate IPO for that piece (called Sterling Commerce), he took advantage of the high fashionability of the dot com boom and got very rich again.
Wealth from stocks did not always correlate to profitability. To quote Wyly, “In 1995, the first web browser, Netscape went public, its shares priced at $28. It jumped to $75, valued at more than the country’s biggest defense contractor, General Dynamics…Netscape launched an ‘irrational exuberance’ in the market…I saw no rationality to these dot-com companies going public and instantly reaching such astronomical heights when they consisted of little more than a Web site and a few computer kids pecking away at their keyboards. To me, it was nothing more than the old Wall Street broker rationale: ‘When the ducks are quacking, you feed the ducks.’”
So Wyly did well by making Sterling Commerce look like a duck (and then getting out before the ducks stopped quacking).
If a lot of the valuation is based on getting in tune with the Wall Street fashion, then perhaps one’s strategy not only needs to look internally at maximizing performance, but also externally at optimizing the fashionality of the stock market.
In the last two blogs, we’ve been looking at the importance of properly defining your category. First we looked at how to define your category for your customers. Then, we looked at how to define your category for your management. Today we will look at defining your category for your shareholders.
How the market categorizes a particular stock often has a large impact upon how investors treat that stock. If you are perceived as being in a hot sector (e.g., category), investors may flock to your stock and bid it up, even if you are not a leader in the sector. Conversely, if you are seen as being in a weak sector, they may abandon you and drive your price down, even if you are a leader in the sector.
Therefore, it is not enough to just manage your individual performance. It is also important to manage how your stock gets categorized, since that may have as much to do with your valuation as your individual performance.
There are two key principles to this process:
1) Look for solid investment category ownership
There are many different goals an investor could have when choosing where to invest. They may be looking for high growth, or maybe low risk, or maybe cash income, or high liquidity, or long-term gains, or support for a particular social cause, or some other factor.
If you want people to prefer to invest in your business (and pay a premium for the privilege), it helps to own leadership in one of these types of investment categories. Being “sort of okay” at many factors is not as good as solidly owning a single factor. For example, being categorized as a strong growth stock will get you preferential treatment by those who want to invest in growth stocks. Or being known as a great dotcom company when dotcom companies are in fashion will get you preferential treatment by those swept up in the irrational exuberance of investing in dotcom companies.
Therefore, a key step in maximizing one’s share price is to:
a) Pro-actively choose an investment category to own; and
b) Have a strategy which re-enforces that position.
We saw this when Sam Wyly proactively tried to position Sterling Commerce as being in the exuberant dotcom category, even if it required a strategy of splitting the company into two parts. This positioning to the investor is very similar to the idea of positioning to the consumer. You
a) Define who you are (the investment problem you are solving),
b) Deliver on the promise of that definition (own the solution in the mind of the investor), and
c) Sell to those who are looking for that type of solution (the investor who wants that type of investment)
2) Consider the fashion cycles of the investment community when timing your equity moves
Timing is an import part of strategy. Strategy for the investor is no exception. Sam Wyly became very wealthy in part because of his timing with investors. Customers come and go. It is better to sell to them when they are coming than when they are going. This also applies to customers of your stock.
Closely observe the fashion cycle for your investors. Design a strategy in advance so that if you start seeing a shift in the fashion, you are ready to move quickly.
3) Manage your audience based on the best category for you
Now I have heard many strategic planners complain that catering to the whims of the investment community is death to strategic planning. Their complaint is that most investors are only looking near-term. They say the investors are only interested in the current quarter and are not interested in the long-term. They say that if you cater to the investors, they will ruin long-term prosperity in the name of short-term gain.
Yes, this is true of many investors. But it is not true of all investors. There are people out there like Warren Buffet, who tend to ignore current fashions in stock and invest for the long-term rather than the short-term. Many of these investors place value on good long-range planning.
To those complainers, I say don’t become a victim of the investment community and don’t let them dictate the rules of your business. Become pro-active in controlling the relationship. Choose a great investment position for your company that puts you in a category which rewards long-range planning. Then pro-actively seek out the types of investors who prefer those types of investments.
If you court the right types of investors, they will support what you are trying to do. If you find enough of them, they will bid up the stock, broadening your appeal even further.
As part of your strategic planning, don’t just position your company to the consumer. Many of those same consumer positioning principles also apply to your investors. As part of your strategic planning, choose an investment category to own and then seek out and court the investors who are looking for that kind of investment. This will increase the value of your business beyond just how your income statement and balance sheet looks.
Although the long-term approach is typically the way to go, it doesn’t hurt to bend a little sometimes to the current fashion of your investors. After all, they are the customer of your stock. Don’t you bend a little to satisfy the current fashion of the customers of your product?