Ramping up communications to the buy side: given the reconfigured research community, public company CFOs need to re-learn how to most effectively communicate with institutional investors. An investor-relations expert provides some clues.

• Author: Wagner, Brooke
• Position: Investor relations, chief financial officers

The thought process institutional investors employ to make investment decisions continues to remain a mystery to many public companies. Considering the fact that busy analysts or portfolio managers at these institutions spend as little as three hours per year engaged in verbal communications with any given company, it shouldn't be that surprising.

[ILLUSTRATION OMITTED]

Making the process seem even more esoteric, investment banks and their sell-side research arms have historically served as successful ombudsmen between public companies and their potential investors. But in the wake of weak market performance and securities scandals, the number of sell-side analysts (who cater to individual investors) has shrunk significantly--which is bringing companies and their potential investors closer together.

Reuters Research reports that over the past four years, sell-side coverage has fallen by 27 percent. In some cases, informal surveys and anecdotal evidence shows that coverage of companies in more mature sectors--manufacturing, process and utilities, and the very new, the Internet and some technology--has been reduced sharply or even eliminated. Analysts who survived the cutbacks have gravitated to the sought-after stocks that spur trading activity and provide the financial support for coverage. Many others joined the ranks of their buy-side brethren. Now, the sell side, smaller in size but not necessarily stature, is flanked by a beefed-up and certainly more sophisticated institutional investor buy side which is spearheading more of its own research and hiring third-party supplemental research providers.

The reconfiguration of research is changing the way companies conduct outreach to potential investors. Although sell-side communications remain an important element in investor relations programs, the factors that drive research coverage greatly favor large-cap or actively traded companies, companies in high-profile industries and companies with active merger and acquisition or capital raising programs. As a result, the approach to buy-side outreach has undergone a significant transformation.

Many companies are boldly taking their equity stories directly to the buy side with increased frequency. Making a beeline for the buy side in many ways may be the best chance, if not only chance, that some public companies have of generating interest in this competitive market.

In a recent study conducted by Citigate Financial Intelligence on how the...