September 2006 CFO Forum Best Practice 2006 1

GROWTH VS. VALUE INVESTORS; GROWTH VS. VALUE INVESTORS; DOs AND DON’Ts IN MANAGING DOs AND DON’Ts IN MANAGING

EXPECTATIONSEXPECTATIONS

By Aviv Boim, CFOBy Aviv Boim, CFO

CFO BEST PRACTICE 2006CFO BEST PRACTICE 2006

CFO Forum, Eilat, September, CFO Forum, Eilat, September, 20062006

GROWTH VS. VALUE INVESTORS; GROWTH VS. VALUE INVESTORS; DOs AND DON’Ts IN MANAGING DOs AND DON’Ts IN MANAGING

EXPECTATIONSEXPECTATIONS

By Aviv Boim, CFOBy Aviv Boim, CFO

CFO BEST PRACTICE 2006CFO BEST PRACTICE 2006

CFO Forum, Eilat, September, CFO Forum, Eilat, September, 20062006

September 2006 CFO Forum Best Practice 2006 2

Who is Wall Street for an IL Company?Who is Wall Street for an IL Company?Who is Wall Street for an IL Company?Who is Wall Street for an IL Company?

Financial Investors U.S. fund managers, with a range of strategies and

industry / geographic focus. Typically meet management on a regular basis

London – mostly emerging markets or European dedicated funds. Typically involves hands-on DD

Israeli funds - rely on meetings with management and local research analysts

Retail investors across the World Wide Web, literally! Research analysts

Financial buy side and sell side, mainly U.S.-based but also local analysts

Marketing research agencies in the field Financial as well as marketing press agencies

September 2006 CFO Forum Best Practice 2006 3

Who is Wall Street (cont’)Who is Wall Street (cont’)Who is Wall Street (cont’)Who is Wall Street (cont’)

Press interviews and conferences of all sorts, addressing directly or indirectly your company and field, e.g. a negative Wall Street Journal column on your peers could cause your share price to crash

September 2006 CFO Forum Best Practice 2006 4

Channel ChecksChannel ChecksChannel ChecksChannel Checks

“Channel checks” – what does it mean? Communications that research analysts are making

with your suppliers and contract service providers, in an effort to gather information on recent events and dynamics that did not become public

Although such communications are likely to breach confidentiality undertakings, they are hard to prevent

In most cases, the results of such checks are released in a note by the analysts days prior to the Company releasing its results; your ability to respond is limited if at all

September 2006 CFO Forum Best Practice 2006 5

A Closer Look into Types of Funds/InvestorsA Closer Look into Types of Funds/InvestorsA Closer Look into Types of Funds/InvestorsA Closer Look into Types of Funds/Investors

The focus of the fund/investor can be divided into the following main categories: Growth vs. Value analysisLong vs. Short positionsFundamental vs. Technical tradeMomentum driven Event driven (M&A, spin off, hedge convertible

issuance etc)

Each of these investor types is looking for a different edge to satisfy its investment criteria, and these criteria could conflict

September 2006 CFO Forum Best Practice 2006 6

Market and Technical ThresholdsMarket and Technical ThresholdsMarket and Technical ThresholdsMarket and Technical Thresholds

A number of market and technical thresholds are key in the evaluation for almost all types of investors: Market capitalization Trading volumeShare price volatilitySimplicity level of the business modelKey parameters of the financial results

(profit/loss, EBITA etc)

For each fund, your market data and parameters could work either way and influence on building or dropping a position

Although it seems like a “chicken and egg” situation – there are always funds with investment policies that will suit your company, almost by definition

September 2006 CFO Forum Best Practice 2006 7

The Investment Message to the StreetThe Investment Message to the StreetThe Investment Message to the StreetThe Investment Message to the Street

First of all – it should be ready and up-to-date at all times, irrespectively of the business cycle and environment

The message should be: Clear and coherent Consistent, subject to market dynamics Easy to understand by a generalist; most of the funds

don’t have the time/ability to dive into the details Unified message – Regulation FD (Fair Disclosure)

addresses it; be strict on “material releases policy” avoid preferential treatment to “smart” investors

Second, it should address: The company’s business model Risks and the potential upside Short vs. long term milestones and triggers

September 2006 CFO Forum Best Practice 2006 8

The Investment Message (cont’)The Investment Message (cont’)The Investment Message (cont’)The Investment Message (cont’)

Funds do compare their notes of most recent comments made by company’s officers; message that varies and is not unified will hurt credibility

Short term and long term company business targets – their fulfillment or push-backs could have a material and immediate impact on buy/sell decisions

Funds monitor the share price and technical trading parameters on a daily basis; could trigger changes of investment position

Portfolio managers are being evaluated based on daily performance, another driver for market dynamics

September 2006 CFO Forum Best Practice 2006 9

Mutual Funds – the Ultimate Shareholder? Mutual Funds – the Ultimate Shareholder? Mutual Funds – the Ultimate Shareholder? Mutual Funds – the Ultimate Shareholder?

Mutual funds focus on long only positions, with a longer ownership horizon

Market capitalization threshold is key to its investment criteria, with less emphasis on trading volume

Tend to accumulate a sizable position (over 5%) over ~ 6 month period, with room to increase over time

Focus on longer-term milestones and expansion prospects

Typically tied to “sell side” analysts, and require quality research coverage; tend to support decisions on internally developed models

September 2006 CFO Forum Best Practice 2006 10

Hedge Funds – Driving Trading Volume!Hedge Funds – Driving Trading Volume!Hedge Funds – Driving Trading Volume!Hedge Funds – Driving Trading Volume!

Hedge funds dynamically build both long and short positions; there are many dozens of U.S. hedge funds with over $1 billion in assets addressing equity (shares)

Common strategy is to be market neutral (beta 0), and reduce net long positions to only ~20-40% of total assets

As a result, hedge funds make aggressive daily modifications to holdings; the market technical thresholds of each company become key in such “adjustments”

Ability to accumulate a sizable position (over 5%) over several weeks can be a key criteria for an investment decision

Compared with mutual funds, positions of hedge funds are subject to a shorter holding period, typically 2 to 3 quarters

Higher focus on short term milestones

September 2006 CFO Forum Best Practice 2006 11

Hedge Funds – Short PositionsHedge Funds – Short PositionsHedge Funds – Short PositionsHedge Funds – Short Positions

Long/short strategy has become a common acceptable investment strategy

Short positions are used to allow low correlation to the market, typically by shorting large cap’s stock, with higher trading volume

Adjustments to short positions are made on a daily basis

Technically, it is harder to identify size and holders of the short positions;

The benefits of shorts – all positions will be covered with the opposite long trade, and typically over a limited period

September 2006 CFO Forum Best Practice 2006 12

Retail Investors – The BrokerRetail Investors – The BrokerRetail Investors – The BrokerRetail Investors – The Broker

Retail Brokers have varying investment horizons and strategies, but generally go less in depth than mutual or hedge fund investors

Brokers generally get information from research analysts, their peers and from the company; both IR and management. IR office plays an important role here

Most brokers require a complete, but simplified message and “story”

September 2006 CFO Forum Best Practice 2006 13

Retail Investors – The IndividualRetail Investors – The IndividualRetail Investors – The IndividualRetail Investors – The Individual

Individual investors generally hold small positions, but are regarded as “high maintenance” holder

Rely heavily on Internet-based sources for news, publicly available research and information on companies

Individual investors are more prone to misconception given their tendency to gather information from online message / chat boards

Be sensitive and allow such communications to flow through IR office

September 2006 CFO Forum Best Practice 2006 14

SummarySummarySummarySummary

There are hundreds of funds/investors/analysts one can meet, mainly in the U.S. and London; a proper mapping and setting the priorities of the targeted investor base is required

Understanding the investment criteria of prospective funds is important in order to have a productive investor interaction

There is no “right” or “wrong” company message; Need to have a full story, with clear and achievable short and long term business targets