The primary objective of investor relations is to increase the stock price. A key driver of the price is the number of shares available for trading by the investment community (commonly known as the “float”). If there is a large float, then investors can easily move in and out of stock positions with a minimal impact on the stock price. There are a number of actions one can take to properly manage the float.
When a company is in need of cash and has a choice of obtaining it through either debt or equity, the investor relations officer (IRO) should point out to the chief financial officer that increasing the amount of stock outstanding will increase the float (once it is registered). This is especially important if there is currently a small float, since the proportional impact on the float would be significant. When the IRO takes this position, she will likely be arguing against the advice of the CFO, who will note that debt is less expensive than equity, and that issuing more stock will drive up the cost of capital. The CFO is correct in this reasoning, but it is more important for a public company with minimal float to increase that float than it is to maintain a low cost of capital.
The IRO should also be active in having stock registered. If a public company privately issues stock, such as through a Private Investment in Public Equity (PIPE), then those shares cannot be publicly traded until the investor waits six months for Rule 144 to take effect or company files a stock registration document, which must be approved by the SEC. A stock registration can be a torturous process, since the SEC may issue multiple iterations of comment letters prior to approval, requiring a company to modify its application and quite possibly other public documents that it had previously filed. The registration process can easily cost $100,000+ in auditor and attorney fees, and can require up to a year to complete. Despite these obstacles, the IRO should make continual efforts to register stock that cannot currently be publicly traded, in order to increase the float.
If the number of unregistered shares is relatively small, then the registration cost will be prohibitive. In this case, the IRO should wait for additional private stock placements to increase the total number, until such time as the registration process will no longer be cost-prohibitive on a per-share basis. Some private stock placement agreements will require best efforts for a stock registration within a certain period of time, which may force the IRO to file registration documents for a small amount of stock.
If the IRO is successful in having a large amount of privately-placed stock registered, she will now be at risk of having the holders of these newly-registered shares dump their holdings on the market. If they do so, the sudden overwhelming supply of stock will put significant downward pressure on the stock price. The best way to avoid this problem is to require the stockholders to sign a lockup agreement, under which they cannot sell their shares for a certain period of time, or can only sell a certain number of shares within predetermined time blocks (e.g., 50,000 shares per month).
An overly complex capital structure can also effectively reduce the amount of float. For example, if a company has multiple types of stocks, bonds, warrants, and other equity instruments, then it is diffusing the amount of tradable equity among all of the various equity instruments. A better approach is to simplify the equity structure by trading common stock for all of the other types of stock. This centralizes all equity into a single large pool of tradable stock.
Another difficulty is when a company has achieved a large float, but holdings are centralized in the hands of a small number of institutional investors. If these investors are not actively trading stock, then the effective float of the company may be far smaller than the standard float calculation may indicate. The IRO can meet with the larger stock holders to persuade them to sell some portion of their holdings, though an investor who is optimistic about the future performance of his holdings will be unlikely to do this. A better long-range approach is to initiate an ongoing series of road shows to present the company either to brokers or directly to retail investors in order to encourage stock placements with the types of investors who are more likely to create an active trading market.
The IRO should offer advice to the board of directors if they are considering the repurchase of stock. A stock repurchasing program sends a signal to the market that the company considers its stock to be undervalued. It also tends to prop up the stock price, if the company makes it clear that it will buy back stock if the price drops below a predetermined level. Further, it increases earnings per share, since there are fewer shares to divide into earnings. However, it also reduces the volume of stock outstanding, which reduces the float. In most cases, the number of shares authorized for repurchase is so small that the float reduction will be minimal. Thus, the IRO should only advise against a stock purchase if the contemplated repurchase is so large that the float will be seriously reduced.
In short, there is no such thing as an excessively large or widely distributed float. The IRO should always strive to simplify a complex capital structure, register stock, and persuade retail investors to buy stock, thereby improving the float.