By ICR Westwicke Team
There’s a saying in investor relations: “You date your investment bankers, but you marry your research analysts.” Essentially, this means that a sell side analyst who covers your company will remain your partner for the long run. Investment bankers, on the other hand, work with a long list of companies and deal with jam-packed, demanding schedules. They don’t disappear after the initial public offering (IPO), but the time they can devote to your company diminishes.
The opposite happens for a sell side analyst: After the IPO, the time they spend interacting with your management team and learning (and talking) about your company increases. Sell side analysts are at every quarterly earnings release, at many investor conferences, and if they sponsor a non-deal road show, they should be by your side at those events, too. The most effective relationship with a sell side analyst is, in theory, like that of a married couple: long-term and full of back-and-forth interaction.
If you’re on your way to an IPO, now is the time to put some thought into what analysts you want to cover your company, and to factor sell-side coverage into the investment bank you ultimately select. Investor relations and IPO advisory firms like Westwicke can guide you through this process, but know that it helps to plan ahead and begin thinking about analyst coverage sooner rather than later.
To get started, here are 10 questions to ask or at least keep in mind as you talk to sell side analysts and figure out the best fits.
With this question, gauge how well the analyst knows the competitive landscape of your vertical. Can the analyst speak knowledgeably about the space?
Determine whether or not companies from your peer group and industry vertical are on the coverage list. Also assess bandwidth — does the analyst have time to cover your company? If you’re the 53rd company on the list, then the analyst is likely stretched thin, but if you’re the 14th, then that might be a good sign. Consider asking directly: How many companies can you cover successfully at a time?
If you’re a small-cap growth investment, for instance, then you want your covering analysts to have strong relationships with the important small-cap portfolio managers on the buy side. So an analyst who only interacts with large-cap portfolio managers may not be as good of a fit for you and your company. Look at each analyst’s coverage list to help you determine where his or her best relationships are likely to be. Feel free to ask the analyst the question directly: Who are your best relationships with on the buy side?
This may sound like a forward question, but it provides critical insight on what motivates a particular sell side analyst. Research analysts are supposed to be compensated for industry knowledge and the value of their stock ideas. If some portion is tied to the analyst’s buy-rated stocks outperforming their hold-rated stocks, then you need to know that.
Is the analyst within the top quartile of his or her own research department? Do his peers think he’s doing a good job? If he’s in the bottom quartile, he probably doesn’t get a lot of mindshare with his sales force or opportunities to present.
Communication style matters. Will the analyst sit down with you face-to-face? Will he ever call you on the phone, or only send emails and expect you to be responsive? Conversely, will he call you incessantly? Most importantly, gauge whether the style of communicating syncs with your own style as the busy CEO or CFO.
Some sell side analysts work alone, while others have associates to help. So even though Sally Smith is listed as the lead analyst, she has other people helping her get her job done. Try to determine whether the analyst has other people around to lend support.
When an analyst asks a client on a non-deal road show, it’s often a good idea for the analyst to attend, too. Non-deal road shows are valuable opportunities to bond with your analyst, so you want to work with those who will accompany you, at least occasionally, on the road.
Not every firm uses price targets and ratings, and it’s best to know in advance if this is part of the research process for all of the analysts you decide to partner with. The nomenclature of “buy,” “hold,” and “sell” differ at every firm. Find out the nomenclature and learn how they use price targets.Also pay attention to the breakdown of current stock recommendations. The large majority of analysts will have more “buy” recommendations than “sell,” but it never hurts to see how and why each analyst uses his or her sell recommendations.
Some analysts say they never communicate with investment bankers — or only in the presence of lawyers — especially those who are part of the global analyst research settlement of 2003. It’s helpful to know what relationship a sell side analyst has with their bankers, how often they talk, and their process for interacting. So ask this up front.
Use the time now — before your company goes public — to make careful choices about your sell side analysts and investment bank. For more expert advice across the entire process of going public, download our eBook, “Westwicke Insider’s Guide to Going Public.”