|Panic in the air|
With turmoil on stock exchanges, rumors fly in the market and don’t give Investor Relations departments any rest
For two days in a row in October, the telephone at Banco Itaú’s Investor Relations (IR) department rang nonstop. The calls came mostly from investors concerned about the rumors that the institution would cut credit concession to individuals, together with two other major private banks, due to the lack of liquidity caused by the crisis. “It was terrible. We wasted a lot of time setting straight a piece of information that was totally incorrect,” recalls Geraldo Soares, IR superintendent at the bank. As improbable as it may sound, the rumor raised suspicions among investors and showed that if IR doesn’t keep its eyes open, there is a great chance for damage.
The rumor originated from a note released October 6 in the online service of a high-circulation Brazilian magazine. The text stated that on that day Bradesco, Itaú and Unibanco had suspended their personal loans operations until further notice, due to their uncertainty as to how much to charge the borrower. “This could have caused generalized panic in the banking sector,” Soares says. Itaú contacted the magazine, which soon removed the link with the information.
JUSTIFIED FEAR – Rumors often arise from a legitimate concern that investors might have. In the recent case of companies that disclosed losses from speculative hedge transactions, the fear spread that other companies – especially exporting companies – had also joined the derivatives fad. Companies like JBS, Marcopolo, Gerdau, Klabin, Vale, and Suzano released communiqués to the market saying that they didn’t engage in derivatives transactions.
André Dorf, IR director at Suzano, recalls that, after the declarations by Sadia and Aracruz on September 25 and 26 – a Thursday and Friday, respectively –, many investors and analysts called IR for explanations. The paper and pulp company wasn’t hit by any rumors, but panic among investors showed that it was best to have everything clear before anything of the sort could come up. “We spent the entire weekend preparing the material concerning the subject, so we could release it on Monday,” says Dorf.
Suzano’s shares didn’t suffer great oscillations when investors stepped away from exporters. Steelworks company Companhia Siderúrgica Nacional (CSN) wasn’t as lucky as it suffered rumors that it was exposed to speculation involving exchange derivatives. On September 25, the company’s shares closed at R$ 46.15. On the following day, after the announcement by Aracruz, its shares fell to R$ 44 at the market’s close. So far, everything was running smoothly. On Monday, the shares opened at R$ 42, but during the day they reached R$ 36.15 before closing at R$ 37.99. On that day, the company announced to the market that their derivative transactions were meant only to protect the company from exposure to exchange variations. They also declared that their available cash was around US$ 1.7 billion. On the following day, the stock started off at R$ 39.01 and closed at R$ 40.75. Whoever had bought the stock at R$ 36.16 and sold it at R$ 40.75 made 11% in about 24 hours. “It’s impossible to know where rumors of this nature come from, but it all leads us to believe that the intention was to speculate,” says Soares.
INTENTIONAL? – Lupatech also suffered the effects of misleading information. After the fateful announcement by Lehman Brothers on September 15, the company’s controlling shares dropped from R$ 50.88 to R$ 16 (value on 10/22) – a variation of minus 68.5%. In the same period, the drop in the Bovespa Index (Ibovespa) was 27.6%. What confused the IR department at the manufacturer of oil and gas equipment was the fact that their shares dropped a lot more than the stock exchange without any changes in the company’s fundamentals that would justify such a difference.
The IR team started seeing market transactions that seemed to be interconnected. “There was a connection between what we saw get recorded in the shareholders’ book, what was happening with borrowed positions, the information that was passed on to some of our investors, and the consequent effect in the stock market,” says Thiago Alonso de Oliveira, financial and IR director at Lupatech. Everything led Oliveira to believe that a speculative movement against the company’s shares was taking place.
Suspicion increased when an investor called the company, worried about what he had heard in the market. “A manager had told him that Lupatech was losing major contracts in Brazil, which was absurd, as we had released to the market our position in contracts, which was very good. It all seemed intentional,” Oliveira says.
As soon as the problem was identified, Lupatech made an announcement to the market dismissing the rumor, and it notified the occurrence to the Brazilian Securities and Exchange Commission (CVM), which is investigating the broker. The Brazilian stock market’s sheriff will request information from the professional in question, to see if he can prove his statements. “Now it is up to the CVM to gather information and determine if the whole chain of events we presented makes sense and if there was any criminal intent,” says Oliveira.
There is no specific regulation to penalize someone who discloses false information to the market. “However, if there is proof that such rumors had the purpose of creating artificial market conditions to benefit a certain group, the CVM may take legal action and punish the guilty parties,” says Osmar Costa Júnior, company follow-up manager at the organization.
In the same announcement to the market, Lupatech denied the rumor that it was positioned in hedge transactions with speculative purposes. “Many investors called us, worried about the possibility that the company was involved with derivatives. That’s why we decided to anticipate things and calm the market,” says Oliveira.
According to professor Dominique Turpin, of the International Institute for Management Development (IMD) – a study center for executives located in Switzerland – the explanations issued by Brazilian companies in the case of derivatives is worthy of praise. “One of the best ways for a company to protect itself from rumors is to stay ahead of the problems, proactively communicating with the investor in a clear and transparent manner.”
At what point should a company go public to comment on a rumor? Isn’t there a risk of spreading the rumors even further? Doris Pompeu, directing partner at Global RI, believes this to be true, and therefore she recommends that rumors should not be commented on at first. To her, a lot of good judgment must be employed when commenting on a rumor. Turpin agrees. “It could be useful not to respond to a rumor that is unlikely or coming from unreliable sources. However, an active attitude by IR in serious cases – with quality information and effective communication – may reduce the potential for damage to the company.”
In the CVM’s understanding, setting the limits between a rumor that should be ignored and one that should be addressed must be done by companies’ directors. “It is important for the company to evaluate whether not responding to some information won’t bring greater loss than coming out and clearing things up,” says Costa Júnior.
MORE WORK – When bad news never seems to stop, the best thing is to keep cool and try to keep a normal work routine. Doris says she was sought out by a company which, very concerned with the crisis, questioned her if it wouldn’t be a good idea to release their results early. “Why? To run the risk of accounting not having closed the numbers properly and having to release a correction later, generating suspicion and worsening the situation even more?” she asks.
Eventually, suggests Doris, a company may start providing more details about data that were released in a general manner, especially as regards a company’s financial position, because this will calm investors down. “There’s no need to rush to do this, all that is needed is to provide the information in the company’s regular announcements,” she says.
Keeping to a routine amidst the ups and downs of the crisis hasn’t been easy. Investors are looking up IR departments as they haven’t done in a long time. “We are undergoing a crisis of trust. It is normal for contacts to be more intense during this period, for the investor is desperate for information that will calm him down,” says Dorf. Lupatech also intensified its activities, with a greater number of meetings, lunches, telephone calls, and international visits. “This is all to convey to investors information about what goes on in the company’s operations, to show that there is no justification for a reduction in market value,” says Oliveira.