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Competing for Institutional Capital: Effective Targeting Gordon Malin Director, Analytical Services March 18, 2005

T H O M S O N F I N A N C I A L. Competing for Institutional Capital: Effective Targeting Gordon Malin Director, Analytical Services March 18, 2005. Fully Valued Share Price. Competition For Shares, Credibility of Management, Perception of Strategy/Ops. Market Valued Share Price.

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Competing for Institutional Capital: Effective Targeting Gordon Malin Director, Analytical Services March 18, 2005

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  1. T H O M S O N F I N A N C I A L Competing for Institutional Capital: Effective TargetingGordon MalinDirector, Analytical ServicesMarch 18, 2005

  2. Fully Valued Share Price Competition For Shares, Credibility of Management, Perception of Strategy/Ops Market Valued Share Price Potential Of A Successful Pro-Active IR Program Price Earnings Multiple Estimated 5 Year Growth Rate %

  3. Goals Of A Pro-Active Institutional IR Program • Create value at the margin – higher multiples are the result of… • Visibility of organic growth opportunities • Historical and probable future operational consistency • Perception of corporate sustainability • Competition for shares • …and thus can be influenced • Gather market feedback for use in modifying investment story • Maintain credibility of management • Understand the context in which company is viewed • Education of the widest relevant institutional audience • Initially interested…properly engaged…consistently informed • Leverage management’s time based on screened importance

  4. Main Issue in Identifying Buy-side Targets • The sell-side is different than the buy-side • Sell-side is focused almost exclusively by industry because brokerage house revenues are driven by trading and deal flow • IPOs are priced relative to publicly traded industry comps • M&A is nearly always within a given sector • Buy-side wants “industry axe”, not price targets or buy/sell recs • Buy-side is an asset gatheringbusiness and is thus typically focused by market capitalization, benchmarks/indices, and product style • Pension, 401(k) markets demand size/style specification • Mutual funds need to be sold via financial planners and ads • Performance and risk measurement are key selling attributes

  5. Practical Example: Nike vs. Reebok (Sell-Side)

  6. Practical Example: Nike vs. Reebok (Buy-Side)

  7. Practical Example: Nike vs. Fedex (Buy-Side)

  8. Practical Example: Nike versus Reebok (Buy-side)

  9. Practical Example: Nike versus FedEx (Buy-side)

  10. Key Buy-side Portfolio Fundamental Screens • Market Capitalization (Micro, Small, Mid, Large, Mega) • Value/Valuation • Forward P/E, EV/EBITDA, EV/Sales, Price/Book, Price/FCF • ROIC, Margins, Working Capital • Income (Dividend Yield) • Growth • Near term year-over-year revenue, EPS growth, share buybacks • Long term secular growth estimates • Leverage (Total Debt/Total Capital, Debt Rating)

  11. Key Buy-side Non-Economic Drivers • Index representation (S&P, Russell, Barra Value/Growth) • Management reputation, corporate governance, other “intangibles” • Industry position/market share (leader, strong follower, laggard, buyout candidate, turnaround story) • Momentum • Price performance (in favor vs. out of favor) • Earnings relative to consensus, estimate revisions • …and finally, the industry in which the company competes

  12. Practical Example: Nike vs. Reebok vs. Fedex • There is no equation for relative and absolute valuation; rather, they can be influenced at the margin with a focused investment in investor relations

  13. Mystery Investor Challenge

  14. Investor Challenge: PetsMart and Dow Chemical PETMDOW $50.7B Large Mid Small Premium Market Multiple Discount High Yield Market Yield Low Yield High Growth Market Growth Low Growth $4.2B Market Cap Valuation Income Growth 23.2x 12.3x 2.5% 0.4% 20% 7%

  15. Investor Challenge: PetsMart and Dow Chemical • Investor owns almost identical amounts of DOW/PETM • Investor allocation by Market Cap differs dramatically from SP500 • iTarget score for DOW/PETM almost identical – and correct! • Almost guarantee you’ve met with this investor in the last 12 mos. • *************************************************************************** • WHO IS THIS INVESTOR? DELAWARE INVESTMENT ADVISORS

  16. Delaware Investment Advisers-Mutual Funds *Primary Investment Style = Yield (Large-Caps) **Secondary Investment Style = Growth (Sm/Mid-Caps) ***Tertiary Investment Style = Sector Specific (REITs) ****Emerging Trend = Non-U.S. Large Cap ADRs

  17. Identifying Buy-side Targets • Do not fall into the trap “who owns my peers that doesn’t own me?” • Understand your investment profile from the buy-side perspective • Determine if you have the time/skills/info necessary to properly segment the buy-side or if you need to outsource your prioritization or purchase a buy-side institutional database and targeting application • Utilize the sell-side when desired but try to control the overall process • Filter investors with your available tools and utilize management when the best opportunities to interact with long-term, partnership-oriented, large current or prospective investors are possible

  18. Identifying Buy-side Targets • A quick guide: • Identify the fundamental fit in the proper manner… • Quantify the size of the opportunity… • Filter for quality… • …with the goal of expanding the share base, reducing the volatility and raising the valuation via the consistent competition for shares

  19. Understand Your Current Investors • The best prospects are very often current shareholders with a solid fundamental fit and more purchasing power – know the “keys” to each and remember that maintaining is as important as targeting • Recognize when conditions are changing; any event or guidance that meaningfully changes your balance sheet, income statement or cash flow statement is likely to cause turnover in the base to varying degrees • Not all turnover is bad, sometimes shareholder migration is required • M&A • Spin-off • Dividend policy change • Valuation changes: multiple expansion or contraction

  20. Understand Your Current Investors • In either day-to-day operational circumstances or in a special situation “scenario analysis”, proper evaluation involves access to the following: • Quantitative info (portfolio data and recent trading insight) • Qualitative info (investors’ need for management meetings) • Experiential info (historical buy/sell reaction to similar events) • With the second half of the audience now analyzed, find efficient ways to tell your story to both current shareholders and prospective investors

  21. Reaching Institutional Investors Directly • One-on-one meetings (most desirable type for the most important firms) • Small group meetings (breakfast/lunch/dinner with a few firms) • Large group meetings (NY, Boston, San Francisco primarily) • Conference calls (for geographically challenging firms) • Analyst days (take the story a step deeper; time it to coincide with news) • Hosting investors at headquarters (individually or in small groups) • Personal relationships with non-target individuals (IR solo or small groups)

  22. Marketing Plan: Global Trends - Canada • Strong desire to diversify into non-Canadian assets • Maximum foreign equity exposure collar JUST removed • Was 30% maximum, now open • Toronto: once or twice a year • Upwards of 20 investors worth management time • Montreal: once a year • Upwards of 10 investors worth management time • Can’t use quantitative analysis • Limited visibility into actual portfolio holdings

  23. Marketing Plan: Global Trends - Europe • European Road Show once per year with Management • European Investors look for: • S&P, market cap >$1B, European Operations or Brand, coverage • Visit consistently • Europe is relationship driven, build and maintain relationship • Targeting European Investors • Can’t use quantitative analysis • Limited visibility into actual portfolio holdings • European Shareholder ID via survey methodology • Must use qualitative analysis • Tend to prefer conservative growth for US portfolios

  24. Key Takeaways • IROs and senior management can create value at the margin by keeping the widest possible relevant audience interested, engaged and informed • When targeting the buy-side, think: market cap, then fundamentals, then benchmarks, then sector -- not the other way around • Understand your investment profile, how/when it might change, and analyze both halves of the buy-side audience – shareholders and prospects • Market the company utilizing management’s time logically and efficiently by maximizing business trips, sell-side conferences, analyst days, small group meetings, and most importantly one-on-one meetings (on a global scale if appropriate)

  25. T H O M S O N F I N A N C I A L Contact Thomson Financial Corporate Group Gordon Malin 195 Broadway New York, NY 10007 Tel: 646.822.2571 Fax: 646.822.6355 Gordon.Malin@thomson.com www.thomson.com/financial

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