What is Investor Relations Worth (Revisited)

My wife, who claims that one of the great proofs of her love for me is that she allows me to keep a dog, always buys every member of the family a new calendar at Christmas time. This year she bought me a calendar featuring dog cartoons from The New Yorker. The cartoon on the cover shows two dogs and one is saying to the other, “I had my own blog for a while, but I decided to go back to just pointless, incessant barking.” Of course, sometimes it’s hard to tell the difference.

One of the most common laments I hear from investor relations officers is that it is difficult, if not impossible, to measure the value of investor relations. It reminds me of the old saying about advertising: “Half of my money is wasted on advertising, the problem is, I don’t know which half”. I suppose it can also lead to IROs questioning their own worth, but we need not stray into such troublesome waters here.

Good investor relations is especially difficult to measure, as there generally are no baselines to gauge it against. You try to look at competitors’ valuations, companies with similar characteristics, the market in general and whatever else comes to mind. From that you hope that a pattern emerges, but whatever pattern may be there is often lost in the overall performance of the company. You often feel as if you’re dancing around the issue without really coming to grips with it.

When things go spectacularly wrong, however, there is a chance to measure damage more precisely. Academics call this an event study and crank out hundreds of them in learned papers accompanied by complex mathematical equations of the sort that gave me nightmare during my freshman year of college. My goals here are a bit more modest.

You might recall that Sallie Mae (NYSE:SLM) hosted a conference call with analysts on December 19, 2007 that was one of the worst examples of its kind. On the day of the call, Sallie Mae lost $3 billion of market capitalization. A month has now passed and given that Wall Street always initially overreacts to both good and bad news, I thought that after a month’s time it would be instructive to see where things stand.

Devoted readers of this blog (yes, there are a few) will recall that back in August of last year I quoted a study by Rivel Research where a survey of buy side investors showed that they thought good investor relations could add as much as 10% to a stock’s value, while poor investor relations could subtract as much as 15% from the value of a stock. From this perspective, here is how Sallie Mae’s disastrous investor relations foray into conference calls stacks up against the broad market and the NYSE Financial index:

Date                         SLM      SPX 500    NYSE Financials
12/18/07                 28.87    1454.98     470.55
12/19/07                 22.89    1453.00     471.25
1/14/08                   20.30   1416.25      450.55
first day % chg      -20.7%  -0.14%       +0.15%
One month % chg -29.68% -2.66%     -4.25%
(Note: I have chosen the date of 1/14/08 as the measurement date because that represents the highest price for SLM in the week leading up to the one month mark from the conference call in question.)

So comparing Sallie Mae’s best price against the worst performing index, they underperformed by approximately 25%. I think this lends some credibility to the values that Rivel research assigned to investor relations. Granted, it is a case study of one (and an extreme one at that) and by itself would not stand up to rigorous academic peer review, but it sure points in the right direction and seems to be in the same range.

So, investor relations officers take heart! There is meaning and value to your function! You add value to your company even if you just convince your senior management to prepare for conference calls and not wing it. Remember, the smartest thing you may do is to convince people not to speak unless they have something intelligent to say.