How to manage investor relations in a bear market

‘It is still the largest cash transaction ever,’ says Karl Mahler, the multi-award-winning head of investor relations at Basel-headquartered pharma giant Roche, of the company’s acquisition of Genentech, which in 2009 was a part-owned subsidiary of Roche. ‘We had to get more than $40 bn out of the system and we had to do it in the middle of the Lehman crisis. Now that really was a bear market.’

Mahler describes the experience as ‘the most horrible time in finance [when] even the banks didn’t trust each other and wouldn’t lend to each other.’ So how did Roche pull it off?

‘In the end we went to the fixed income guys,’ Mahler explains. ‘There was still lots of money around, but nobody wanted to lend it to anyone – so you had to try to get the market to open up for you.’

Ultimately, he says Roche got the financing because ‘investors trusted in the financials’. And that’s his key lesson for anyone on the lookout for tips before the cycle turns: ‘The market is always going to look at the business fundamentals. That will always prevail.’

The event in question – the collapse of Lehman Brothers – is a key point in what many consider to be the most serious financial crisis since the Great Depression and the last real bear market. But there have been dips along the way, of course.

The Covid-19 pandemic triggered its own bear market in March 2020, for example, though stocks rallied back to historic highs, while there have often been sector-specific downturns, too.

A dip into oil

Using the energy industry as a case study – ‘because the fossil fuel space has been in a recession for a few years’ – Nick Mazing, director of research at financial and corporate research platform Sentieo, examines how sentiment and communications have been impacted by that downturn.

The data shows a spike in immediately pressing issues being addressed on earnings calls, he explains. ‘For example, we can see that energy sector transcripts with mentions of ‘redetermination’ [a secured lending term related to the industry] spike during times of distress,’ he says. This increase is seen after the global financial crisis, again in the 2015-2016 energy turmoil and then again during Covid-19, when oil futures actually turned negative.

There are more permanent changes, too. ‘As the capital markets soured on the energy sector, we can see that ‘free cash flow’ and ‘break even’ are now frequent topics in energy sector transcripts,’ notes Mazing.

Sentieo can search transcripts for individual terms but it also tracks sentiment. ‘Changes in language around crises are observable at both the individual word level and at the broader sentiment level,’ explains Mazing. ‘We can see the oil industry turmoil in our transcript sentiment models.

'For example, looking at management sentiment for two oilfield services names, Schlumberger and Halliburton, we can clearly see the 2015-2016 crisis and then Covid-19. Revenues and sentiment declined during these two crisis periods but, more recently, we can see both revenue change inflecting and sentiment bouncing back.’

Taking a broader view of the sector, Mazing says things played out as you’d expect. ‘Investors spent more than 10 years financing the US shale boom but eventually wanted some money back,’ he says, pointing to other sectors today, such as software as a service, where investors are currently looking only for growth. ‘Eventually, this will change’.

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This is an extract of an article that was published in the Fall 2021 issue of IR Magazine. Click here to read the full article.