Communicating That 1+1 = 3
By David Calusdian, Executive Vice President & Partner
A well-known portfolio manager once said to me that he loved diversified industrial companies “for their break-up value.” If you’re in the industrial space, this is the polar opposite of how you want investors to think about your company. For an industrial, it all comes down to ensuring that investors see your company as being more than a sum of its parts – not less. Here are four tips to ensure that investors believe your company is worth more than its breakup value.
Synergize! An industrial company’s collection of businesses can either be viewed as just that - a disparate group of autonomous operations individually contributing to the corporate P&L. Or they can be seen as interconnected, mutually supporting components of a single profit-generating machine. The first way to demonstrate that your company’s whole is indeed greater than the sum of its parts is to communicate how the portfolio management philosophy of the business fosters cross-selling throughout the organization, driving revenue growth. Also focus on how management realizes cost synergies across the enterprise, such as through lower fixed costs due to shared overhead or greater combined purchasing power.
Don’t Marginalize the Margins. For most industries, it’s not just about how fast the top line is growing, but how much of that growth is dropping to the bottom line. This is even more important for diversified industrial companies. Since their revenue growth is typically less than stratospheric, investors look to management to expand margins and squeeze as much profitability as possible from every sales dollar. It’s crucial in your communications to explain how the company plans to grow margins. Are you moving up the value chain with your product portfolio? Are you reducing commodity costs? Consolidating manufacturing facilities? Speeding your cash conversion cycle? Raising prices?
Give Your System Justice. It seems like every manufacturing company has its own proprietary “Business System,” uses Lean Manufacturing or Six Sigma processes and holds regular Kaizen sessions to improve operating efficiencies. They all seem to brag about how their systems provide them with a competitive advantage. But to truly differentiate your business systems and processes in the minds of investors, you need to provide specifics, show results and, more importantly, demonstrate room for further improvement. For example, provide detailed case studies on model manufacturing lines that already have – or are just beginning to – improve efficiencies and product margins.
Leadership by Example. Most companies brag about their “proven” or “experienced” leadership to investors so much that it has become cliché and downright useless as an investment highlight. But done correctly, a diversified industrial company can demonstrate their management team has the experience and ability to manage their portfolio of businesses effectively, enhance margins and grow the enterprise. For example, highlight the experience of management team members who’ve come from companies with renowned manufacturing process expertise, like Toyota or Danaher. Also ensure that you move beyond the cliché and are very specific in highlighting recent achievements as well as accomplishments at past employers.
For diversified industrial companies, communicating the basics just isn’t enough. Even if your end markets consider your products to be commodities, your stock should not be seen as one. Show investors the formula you are using to build a business that is greater than the sum of its parts. The formula most likely will include sales and cost synergies, a strategy to enhance margins, and a management team with the proven ability to enhance operational efficiencies. Communicating in this way will ensure that investors see that, at your company, 1+1 does, in fact, equal 3.
David Calusdian, an executive vice president and partner at Sharon Merrill, oversees the implementation of investor relations programs, coaches senior executives in presentation skills and provides strategic counsel to clients on numerous communications issues such as corporate disclosure, proxy proposals, shareholder activism and earnings guidance. David’s clients are focused in the industrial, life sciences and technology sectors.
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