INVESTMENT COMMUNITY PERSPECTIVE

Consolidation is happening all around us, driven mainly by technological advances that allow us all to be more efficient. Adopt, adapt, or get pushed aside. And the evolution (it is not a revolution) is happening everywhere in our business: issuers (industry), the sell-side and the buy-side. Understanding what companies face to deliver their messages effectively is likely now as important (if not more so) as the message itself. Think Marshal McLuhan’s evolutionary and thought provoking book, The Medium Is the Message.

Industry (as in your industry)

I will use the oil and gas industry as an example of technology changing the landscape for an industry. I’m certain that every industry has a similar story. About seven years ago, the oil and gas industry adopted horizontal/multi frac drilling technology; as a result, more expensive wells led to greater output of oil and gas from geological zones previously thought non-productive. Early adoption of technology resulted in consolidation; more lands were acquired to exploit the new technology. Consequently, U.S. oil production rose at previously unthinkable rates and the U.S. has become the world’s largest oil producer. The transferability of technology helped push world oil production to record levels, to a point where production now exceeds demand, and the price of oil has fallen. Low prices have crimped economics, which has led to a different wave of consolidation.

Industry (as in the IR role)

The tools at an IRO’s disposal have grown by leaps and bounds, not just in terms of capacity to gather information but also with respect to the ability to disseminate messages. But as avenues for distribution expand, so does the need for monitoring. Here technology rides to the rescue again and enables IROs to do more with less (which in itself is a form of consolidation). The IROs I know have been very busy staying on top of technological tools that make them more efficient and effective. You all do so much more today than was possible 10 years ago, and far more than 20 years ago. You fight for your job, and you fight for your business. Adopt, adapt, or get pushed aside.

Sell-side (Investment Dealers)

I have written about this in the past, but the sell-side (the investment dealers) have seen trade commissions collapse as technological advances in sales and trading have taken hold. This has led to greater competition for trade and a drive for economies of scale; it has forced sell-side consolidation. Fewer dealers may mean fewer companies following your company. In addition, no longer is there just one Exchange to trade each stock. There are now many exchanges, all trading the same stock simultaneously (and the IRO may be unaware of some of these). Driven by technological advances, the number of trading venues initially increased as they segmented the market but they, too, are now going through consolidation. (For a great read on trading platforms, read Flash Boys by Michael Lewis.)

Buy-side (Portfolio Managers)

Long gone are the days of manual spreadsheets on stocks. Everything is computerized; portfolios are priced to the second and funds’ investors and their holdings are tracked (and shift constantly). Portfolio managers have at their disposal technological tools to help them manage more money efficiently. More efficiency means lower fees charged, thus attracting more investors. Consolidation has been the name of the game on the buy-side, driven by economies of scale.

Consider that Exchange Traded Funds (ETFs) now exist – extremely low fee funds that track aspects of Indexes. Gone is the need for portfolio managers, replaced by a marketing team looking to create portfolios to track whatever market demand may be. There is a basket of preselected stocks and buying and selling merely mimics fund flows – all virtually automated. The traditional portfolio manager is effectively ‘competing’ with ETFs, which drives down fees and drives consolidation as well.

Like Sand Dunes, the Landscape is Always Changing

Mission: Impossible had a great starting line; “Your job, should you choose to accept it…”. We should all keep this in mind. Historically, industries were constantly changing and adapting but the process was slow, even glacial. Today, technology has sped up the evolutionary process. Change seems constant and affects virtually everyone. Our jobs are constantly evolving and we need to stay on top of what is happening all around us. Yet as we become more and more efficient with our time, thanks to technology, we can become more and more vulnerable to consolidation, which is happening all around us. It may sometimes seem like the only constant is change.

Adopt, Adapt, and be Relevant.

So what do you do? Embrace the inevitable and use all tools at your disposal. Make sure your company learns to adopt and adapt. Do your part to make sure that management stays abreast of all changes you see within your industry, and what accounts are telling you. Be aware that the sell-side is itself adopting and adapting, and keep the lines of communication strong. Watch for changes in terms of coverage, personnel, methodologies and industry focus. Watch the buy-side trends, and know how the buy-side is adapting and adopting. Know that for a market to exist there must be some human decisions; a world of ETFs only cannot exist. Know the key portfolio managers, learn their styles and focus, and adapt your style to theirs. Read articles to gain IR industry insights (CIRI is a great source), talk to peers, talk to dealers, talk to portfolio managers and do not be afraid to ask questions. Do not do all the talking, either; do your share of listening. Stay on top of the shifting sands, and make what you do Mission: Possible.

Dirk Lever is Managing Director, Institutional Equity Research, AltaCorp Capital Inc.