There’s a saying in investor relations: “You date your investment bankers, but you marry your research analysts.” Essentially, this means that most sell-side analysts who cover 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 sell-side analysts: after the IPO, the time they spend interacting with your management team and learning about (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 relationships with sell-side analysts are, in theory, like those of married couples: full of back-and-forth interaction and long-term.
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 Partners 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.
1. Why do you want to cover my company?
With this question, gauge how well the analyst knows the competitive landscape of your vertical. Can the analyst speak knowledgeably about the space?
2. What is your coverage list, and how many companies do you currently follow?
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?
3. Where are your best relationships with the buy side?
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?
4. How are you compensated? What are the factors of your compensation?
This may sound like a forward question, but it provides critical insight on what motivates a particular 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.
5. How does your internal sales force rank you among your firm’s research peers?
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.
6. What are your preferred channels of communication with the companies you cover?
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.
7. How large is your research team?
Some 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.
8. How often do you travel with the companies on your coverage list?
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.
9. Do you use price targets for the companies you follow? Similarly, do you have ratings on the stock that you cover?
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.
10. How and when do you communicate with your firm’s investment bankers?
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 analysts have 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. To learn more about the sell side, listen to our webinar, “Wall Street Revealed: How Does the Sell Side Really Look at Companies?”